30 years of VCTs – from strength to strength

30 years ago today, on 29 November 1994, then Chancellor Kenneth Clarke stood up to deliver his budget. “This budget concentrates on strengthening British businesses”, he stated.

Indeed, he introduced “an imaginative set of measures aimed at generating equity investment in dynamic, innovative, growing businesses”.

On that day 30 years ago, Venture Capital Trusts (VCTs) were born.

Since then, thousands of private investors have backed “dynamic, innovative, growing businesses”.

In the first tax year after the legislation was introduced, 12 VCTs raised £160 million. 30 years on, VCTs have raised and invested a total of £12.5 billion. Look at it another way: £12.5 billion of investors’ money is helping private companies grow. Notable examples include Zoopla, the first VCT-backed business to achieve a valuation of over $1 billion, to Watchfinder, Gousto, Unbiased and Interactive Investor. Ambitious, entrepreneurial companies like these create thousands of jobs – current VCT-backed companies employ 92,000 people in the UK – and fuel economic growth.

Please remember, not all companies turn into success stories – failures are common amongst startups and young businesses.

To support this virtuous circle of investment and economic growth, the government offers valuable tax relief when you support young British businesses by investing in VCTs. You could receive up to 30% income tax relief – a tax break of up to £60,000 if using the full £200k VCT allowance. Note, tax rules can change and benefits depend on circumstances.

In addition, any dividends VCTs pay are tax free, though they are variable and not guaranteed. This could be particularly valuable now the dividend tax-free allowance is at a historic low of £500.

The generosity of the tax reliefs and the allowance have contributed to the growing appeal of VCTs, particularly at times when rule changes have made pensions more restricted or potentially less attractive.

As the tax burden continues to climb, VCTs are one of the few tax-efficient investment options still available to wealthier and more experienced investors. Pensions tax relief has cut again and again, while frozen tax thresholds and allowances mean more people are paying more tax. VCTs are one of the few tax reliefs to have survived the last budget unscathed. Indeed, our figures suggest total VCT investment this tax year is already approaching £240 million, up around 25% year-on-year.

Could now be a good time to invest? And with other tax changes in the 2024 budget, are VCTs more attractive to investors? We get the views of three very different and well-respected VCT managers: Chris Lewis of Pembroke VCT (also current chair of the Venture Capital Trust Association), Seb Wallace of Triple Point Venture VCT, and Paul Davidson of Octopus Apollo VCT.