Why consider VCTs?
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
Venture Capital Trusts (VCTs) have seen a record-breaking year – with over £900 million already raised so far in the 2021/22 tax year and several trusts raising tens of millions in days. It is expected VCTs in total could raise £1 billion by the end of the tax year – the highest amount ever.
Once considered a niche investment for investors who have maximised their pension and ISA allowances, VCTs have steadily become more popular – even with younger investors less affected by pension and ISA restrictions.
The average age of VCT investors in 2017 was 67, but it’s now 56. A study by the Financial Times recently revealed over 7% of their readers were intending to invest some of their bonus money into VCTs or EIS investments – many for the first time.
Why this increase in popularity? Here, we give an overview of VCTs and how this asset class could be a consideration for experienced investors looking to diversity their portfolio.
What are VCTs?
A VCT is a publicly listed investment company run by a fund manager. It aims to make money by investing in small, unquoted, entrepreneurial companies and helping them grow. A VCT investor would be exposed to a portfolio of these companies.
Small and medium-sized enterprises are crucial to the growth of the UK economy: they create 61% of employment and 52% of turnover in the private sector. However, there are significant risks associated with investing into smaller companies: you should expect some to fail.
To help compensate for this risk, and encourage private investors to invest in VCTs to bolster the economy, the government introduced a number of tax incentives:
- Up to 30% tax relief is available with a VCT investment, provided shares are held for a minimum of 5 years. The annual allowance for VCT investments is £200,000 – meaning investors could claim up to £60,000 back from a year’s income tax bill.
- Any dividends paid are tax-free. This could be particularly attractive to investors affected by the dividend tax increase to be introduced in the new financial year.
- Capital gains are tax-free. Unlike with other mainstream investments, you won’t have to pay tax on any capital gains made when disposing of your VCT shares.
With the limited options for tax-efficient investments and increasing restrictions on pensions and ISAs, the generous tax benefits associated with VCTs could help make them an attractive investment choice. Tax rules can change and benefits depend on circumstances.
Free factsheet: VCTs at a glance
For more information please see our simple factsheet, which gives an overview of VCTs, how they work, the risks and benefits.
If you have any questions on the guide or another investment matter, please get in touch.
You can email us or call us on 0117 929 0511. We’re open from 9am to 5.30pm Monday to Friday.
How have VCTs performed?
Our research shows VCTs as an asset class have performed impressively in recent years, with some in fact outperforming more mainstream investments. Overall, the VCT asset class (which we have measured as the average of the top 20 largest VCTs) has doubled investors’ money on a net asset value total return basis over the last 10 years. Past performance is not a guide to the future.
Supporting this performance is the growth of the companies in which VCTs invest. A third of VCTs are invested into companies have grown revenues 50% or more year on year – whereas only 3.2% of the UK’s top 350 listed businesses are growing at this rate.
Additionally, VCTs have backed some of the UK’s fastest-growing smaller business – including eight unicorns (start-ups achieving $1 billion+ valuation). Octopus Ventures, has backed four through Octopus Titan VCT– with Hargreave Hale AIM VCT, Draper Esprit VCT and the British Smaller Companies VCTs also joining the club.
Of course, only a small percentage of VCT-backed companies have gone on to become unicorns, and investors should expect a number of companies to fail. To put it in context, Octopus Ventures partner Simon King explains that, out of 10 companies within a VCT portfolio, Octopus “would expect five to fail, three to do okay, one to do reasonably well and one to shoot the lights out”.
Experienced investors considering VCTs as an option to diversity their portfolio need to be aware that, as with all investments, you could lose money. Moreover, the investment risks with VCTs are much greater than with more traditional investments; VCTs invest exclusively in small, young companies, potentially more likely to fail than larger and established businesses.
VCTs shares are also more difficult to sell than mainstream investments, because they are less liquid. As such, investors must be prepared to be invested for the long-term and be able to withstand a potential total loss.
Current VCT offers
All our VCT offers aim to allot shares in the 2022/23 tax year – this means you should be able to claim 30% off your income tax bill for this financial year (not guaranteed). Our current featured offers include Pembroke VCT and the ProVen VCTs – you can apply for them online.
Please note, all VCT offers could closer sooner than the planned deadlines if capacity is reached.
Save 2.5% on the initial charge, plus 0.15% annual rebate for three years. The deadline to apply for allotment in the 2022/23 tax year is 30 June 2022 (3pm, cleared funds).
Save 3% on the initial charge, plus 0.10% annual rebate for three years. The deadline to apply for allotment in the 2022/23 tax year is 29 April 2022 (1pm, cleared funds).
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
See current VCT offers
Browse all VCT offers available through Wealth ClubRead more about See current VCT offers