Can you guess the year?

Can you guess the year? 

The government is in disarray. No majority in parliament; rife speculation over its leadership. Europe continues to divide the party. It’s against this backdrop the Chancellor presents the budget.

“This budget concentrates on strengthening British businesses.”

Sound familiar?

Yet these are not the words of Phillip Hammond. They don’t even belong to this century. In fact, you need to rewind 24 years to track down the speaker.

In his speech on 29 November 1994, Chancellor Kenneth Clarke introduced ‘an imaginative set of measures aimed at generating equity investment in dynamic, innovative growing businesses.’

And so, Venture Capital Trusts (VCTs) were born. 

Have VCTs delivered?

Since 1994 the popularity of and demand for VCTs has grown. Last year £728 million was raised, the second highest ever.

VCTs have provided funding for well-known names such as GO Outdoors, Watchfinder, Secret Escapes, Monica Vinader, Everyman Cinemas, Gousto and Five Guys. Zoopla was the first VCT-backed £1 billion company.

From security products and telecoms providers to a shower tray manufacturer – VCTs invest in hundreds of companies you’ll have never heard of, producing tax free dividends for investors. A 5% dividend from a VCT is the equivalent of a taxable dividend of 8.1% for a top-rate taxpayer. Last tax year VCTs paid a total of £398 million in tax-free dividends. Tax rules can change, and tax benefits depend on circumstances. 

Longer-term performance is impressive. Over three years the average VCTs are up 24%, 55% over five years and 112% over ten years on average. Past performance is not a guide to future returns. 

As one can expect, alongside the successes all VCTs have had their fair share of failures. These are higher risk investments. VCTs invest in smaller companies which are illiquid and susceptible to failure. For every Zoopla there are several failures.

Can the good times continue?

Rule changes mean VCTs must make riskier investments with new money. That said, many long-established VCTs can and do still hold established investments made before the rule changes. More mature businesses could initially help balance out the newer investments.

A ‘nice problem to have’ for Ken Clarke

Ken Clarke’s prediction came true:

“I believe that venture capital trusts will make a successful contribution to filling a gap in our enterprise economy by encouraging more people to become venture capitalists.”

Indeed, the problem now could be one of increasing demand but limited supply. In the last two years the number of VCT investors has risen 40%. Cuts to pension allowances, dividend tax hikes and the clampdown on buy-to-let investing are set to hit investors harder this year. For experienced investors, VCTs could be one of the few tax-efficient avenues left. 

Image credit: mauricedb on flickr.com

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