Venture Capital Trusts – Is it an investment opportunity for you to consider?
09/12/2021
09/12/2021
A Venture Capital Trust is a company which raises money from investors and uses it to invest in the UK’s up and coming companies who are looking for funding. VCTs are attractive to investors because the government, who wants these young businesses to grow, offers some generous tax relief opportunities.
With buy to let properties becoming ever less tax efficient, interest rates on savings accounts virtually non-existent and many pension pots at their capacity1, VCTs offer another option for diversification within your investment portfolio. As an investor you would receive up to 30% income-tax relief on your initial investment (that’s £60,000 income-tax relief if you invest the maximum £200,000) and then any dividends received and capital gains on top of that are also tax-free. It’s worth bearing in mind that you have to hold on to your stake in a VCT for a minimum of 5 years, after that you can then take stock (sorry!) and weigh up if you wish to keep your investment within the VCT or you can decide to reinvest the proceeds in another VCT and receive a further 30% income-tax relief or you could have your money back.
VCTs were introduced in 1995 as a way of encouraging investment into the UK’s entrepreneurial businesses. Some companies that started off with funding from VCTs have become household names (Zoopla, Depop, Gousto) However, it is crucial to remember that many start-ups struggle in their first few years and some will unfortunately not be successful. This is why the tax incentives are so appealing – it’s a form of compensation for the risk you are taking with your money.
According to HMRC, over £8 billion2 has been raised in VCT’s since their conception in the 90’s and 20,000 investors have claimed income-tax relief on VCTs in the last year3. Returns from VCTs have been robust despite the impact of Covid-19 on the UK economy4. Nick Britton of the Association of Investment Companies5 said: “The average return was 4 per cent over the year, which shows more resilience than some of the FTSE 100 companies.” The reason for this is likely to be that the majority of these VCTs are investing in tech companies.
If investing in burgeoning businesses is appealing and you would like to reduce your income tax bill whilst receiving tax-free income, a VCT portfolio, could be a valuable source of income if you are preparing for retirement or have additional savings with which to diversify your portfolio. As a client of ours we will happily discuss the options available to you, please contact your Independent Financial Adviser to arrange a phone call or meeting.
All the risks associated with this investment are detailed in the product literature for the relevant scheme and should be read carefully. These include but are not limited to;