Venture Capital Trusts – The UK is one of the world’s most successful markets for entrepreneurial small companies. But start small, ambitious companies usually need investment capital to help them grow and develop.
A Venture Capital Trust or VCT is a publicly listed investment company run by a fund manager and quoted on the London Stock Exchange. A VCT investment is designed to encourage individuals to invest indirectly in a fund with a range of young, innovative, unquoted, and therefore higher risk trading companies, and to make money through supporting their growth.
The UK Government introduced VCTs in 1995 as a way of encouraging investment into Britain’s exciting, entrepreneurial businesses. Since they were introduced, VCTs have helped to create many thousands of jobs, reward innovation and strengthen the UK economy.
Venture Capital Trusts are HMRC-endorsed and are designed to reduce tax bills, whilst stimulating the economy by investing in early-stage, growth-oriented UK companies.
There are three good reasons why now is believed to be a good time to make a VCT investment which are linked to the recent economic downturn:
- There is a pool of talented individuals who will have been made unemployed and some will have been waiting for a stimulus to go it alone and bring a business idea to fruition.
- Valuations are comparatively cheap due to the aftermath of Covid-19 and the cost-of-living crisis.
- Established companies are spending less on R&D, thus allowing an opportunity for budding entrepreneurs to fill the void this creates with their new ideas and innovations.
VCTs put UK investors in a particularly fortunate position and can make a compelling addition to a modern, balanced, risk-managed portfolio. The government is keen for experienced investors to invest in the types of companies supported by VCTs, because they create jobs and support economic growth. To help compensate for the higher level of risk involved, generous tax benefits are offered. These are summarized as follows:
- High annual allowance – invest up to £200,000 per tax year.
- Up to 30% tax relief – save up to £60,000 on income tax when you invest in newly issued VCT shares, provided they are held for at least five years.
- Tax-free dividends – no Income Tax is payable on dividends from ordinary shares in VCTs.
- Tax-free growth – no CGT on gains from disposals of ordinary shares in VCTs.
You should be prepared to hold VCT shares for a minimum of five years. If you decide to sell your shares before then, you will be required to repay to HM Revenue & Customs (HMRC) any upfront income tax relief you’ve claimed.
A Venture Capital Trust’s investment can also provide a very effective mechanism for business owners to extract cash from their companies in a tax-effective manner.
VCT fund managers typically look to invest in entrepreneurial companies which are creators of new markets or disruptors of existing markets. Popular sectors in which VCT investments are made include renewables, fintech, B2B software and healthcare.
There are many high-profile examples of businesses who were backed during their early stages by VCT investments and developed to become household names. These include Zoopla, Cazoo, Depop, Uber, AirBnB and Secret Escapes. to name just a few. Most ‘hyper growth’ happens during the early stages of a company’s life cycle before it goes public or is bought by a larger competitor. Companies that eventually go public currently remain in private ownership longer than was previously the case. For example, tech companies which achieve a public listing will currently have been in private ownership for an average of approximately nine years, whereas this period was approximately four years in 1989.
Understanding the risks
VCTs are high risk investments which invest in small, unlisted or AIM-listed companies, and providers encourage investors to take advice from a regulated professional adviser to ensure the suitability of their investment.
This is where we come in. Within our assessment, we will look at your personal tax circumstances, previous investment experience, attitude to risk and capacity for loss to ensure that the product is suitable for your needs. We are fully regulated and authorized by the FCA to provide advice on tax planning products, which means that in the event that the product was not suitable to meet an individual’s needs, the investor has recourse to the Financial Ombudsman Service (FOS) to independently assess the merits of the advice provided. We are required to seek to deliver the best outcomes for our clients and are obliged to carry professional indemnity insurance in this regard. If you were to purchase a VCT from a regulated distributor on a non-advised basis, you would not receive the same level of service or the reassurance of FOS protection.
We are confident that our fees for providing advice on these types of investment are the lowest that you will find anywhere.
For VCT investments, our advice fees are 1% of the amount invested, subject to a minimum of £300 in addition to provider fees which vary across fund managers and are typically 3% upfront.
We urge investors to think long term, and to review how asset allocations are constructed. So, please get in touch for a free, no-obligation initial discussion if any of these points resonate with you as an investor, so that we can together seek to deliver a suitable investment outcome.