VCT guide

Introduction This guide is designed as a practical and impartial resource for financial advisers, providing concise and common-sense assistance with the technical, planning and legislative aspects of using Venture Capital Trusts (VCTs). Relevant case studies, an outline of the rules and updates on rule changes give clarity on when and how VCTs can be helpful. This reference document also provides useful tips on how to assess VCT offers and providers, as well as client suitability considerations that inform advisers on making the best use of the VCT tax reliefs. While the key focus of this guide is the practicalities of using VCTs, our regular VCT Industry Report is the place to go for opinions, forecasts, research and market analysis. This insightful resource includes key metrics and provider and adviser discussions, and is available free of charge from Intelligent Partnership. Learning Objectives After reading this guide, advisers will be able to: • Apply the main rules and practicalities that govern the VCT reliefs available. • Explain the main risks associated with VCT investments. • Define the key aspects that need to be taken into account when considering client suitability for a VCT investment. • Evaluate the main considerations for a VCT investment and investment provider. • Access planning examples that can apply to real-life situations. • Ascertain the circumstances in which VCT reliefs can be withdrawn. Acknowledgements IAN SAYERS CHIEF EXECUTIVE ASSOCIATION OF INVESTMENT COMPANIES 2018/19 was a bumper tax year for Venture Capital Trusts (VCTs) with the sector raising £731 million for investment in small businesses. This is the highest amount ever raised at the current 30% level of upfront tax relief and the second highest amount since VCTs were created in 1995. There is clearly a need for VCTs which offer retail investors access to small unquoted companies, with generous tax reliefs to compensate them for the higher risks involved. Though the companies VCTs invest in start small and are high-risk, they can become household names in the future, helping to create much needed growth. Consistent high demand for VCTs reflects the growing recognition of the benefits they provide to investors. They also have a strong long-term record of delivering growth and income returns. An investment in the average VCT over 5 years is up 36% and over 10 years up 178%. The average yield for the VCT Generalist sector is 7%. In the 2017 Budget, rule changes were announced to ensure VCTs invest in the ambitious, Opening Statement innovative companies that are the backbone of the economy. However, these younger companies will be riskier than some of the past investments and this must be considered when projecting likely income levels in the future. These returns, whether in the form of dividends or capital profits, are free from any income tax or capital gains tax. Combined with the 30% up-front income tax relief available when subscribing for new shares, this makes VCTs an attractive prospect for tax efficient portfolio planning for those clients for whom VCTs are suitable. This is likely to be more relevant for high earners facing pension restrictions. The changes to the amount high earners can pay into pensions have prompted further interest in VCTs over recent years. VCT managers have continued to find a host of opportunities. Of course, it’s too early to understand the long-term impact of Brexit but usually the growth companies that attract VCT funding are global in their approach and opportunities are opening up in the US, Middle East and Asia. The key Brexit worry for VCTs has been the status of Europeans working in the UK after Brexit and whether smaller companies will be able to retain and attract talent. The government’s continuing support for VCTs is undoubtedly good news for the UK’s younger companies as they will benefit from the investment and expertise they need to grow. VCT-backed businesses deliver vital economic, social and environmental benefits, with jobs more than doubling after VCT investment. And VCT investment continues to be a catalyst for change at some of the UK’s fastest growing businesses. A publication like this is rarely the product of one organisation’s efforts; to ensure that it is up to date, comprehensive, accurate and captures all of the key issues requires a wider input. We’ve had plenty of help producing this Guide and would like to thank David Brookes, Sarah McGuffick, Ian Sayers and Rhodri Whitlock, who have contributed their thoughts to this Guide. We would also like to thank our partners: Amati Global Investors, Blackfinch Ventures, GrowthInvest, NVM Private Equity, Octopus Investments and Seneca Partners. It would not be possible to produce educational material like this without their generous support and contribution towards the production, printing and distribution of the guide.