Coming soon: why consider VCTs this tax year?

Private investors made record-breaking investment into Venture Capital Trusts (VCTs) last tax year (2021/22) of £1.13 billion – the highest amount ever and a 65% rise from the year before. The most popular offers filled quickly, raising tens of millions within days. 

What is increasingly attracting investors to VCTs?

Once considered more of a niche investment, VCTs have steadily become more popular – not least with investors concerned about significant tax increases and those who have maximised their pension and ISA allowances.

Indeed, in our recent survey – completed by over 1,300 VCT investors – 71.7% cited tax as a reason that prompted them to start investing in VCTs. The exposure to high-growth-potential investments (with commensurate high risks somewhat mitigated by the tax reliefs), the diversification VCTs can add to one’s portfolio and the opportunity to support UK entrepreneurship were also mentioned. Over 94% believe investing in VCTs helps back the next generation of UK entrepreneurs.

What are VCTs, in a nutshell? How have VCTs performed? Which VCTs have announced their intention to fundraise this tax year? Read on to find out more.

What are VCTs, in a nutshell?

A VCT is a company listed on the London Stock Exchange – akin to an investment trust and run by a fund manager – which invests in young, entrepreneurial and hopefully fast-growing private UK businesses.

Small businesses account for three fifths of the employment and around half of turnover in the UK private sector, so play an important part in driving the economy. 

However, they’re also more prone to failure than larger, established companies. To compensate for this – and to encourage private investment – the government offers generous tax incentives:

1. Up to 30% tax relief is available – the annual allowance for VCT investments is £200,000, so investors could claim up to £60,000 back from a year’s income tax bill. 
2. Any dividends paid are tax-free – this could be attractive to investors affected by the dividend tax increase introduced this financial year. 
3. 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.

Note: This is a brief overview of a more complex subject. To retain the tax relief, VCT shares must be held for at least five years and the VCT must remain qualifying. Tax rules can change and benefits depend on circumstances.

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 (June 2022). 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 (December 2021). 

See VCT performance over 3, 5 and 10 years »

Risks: important

Experienced investors considering VCTs 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 mainstream investments; VCTs invest exclusively in small, young companies, potentially more likely to fail than larger and established businesses. 

A handful of VCT-backed companies have famously gone on to become unicorns (start-ups achieving $1 billion+ valuation), such as property platform Zoopla and meal ingredients subscription service Gousto, both now household names. That said, for every Zoopla and Gousto, there will be many more companies that fail or languish, as is to be expected.

Also bear in mind VCTs shares are more difficult to sell than mainstream investments. As such, investors must be prepared to be invested for the long-term and be able to withstand a potential total loss.