The latest government figures on venture capital trusts (VCTs) have offered some pre-Christmas cheer, describing a market that looks to be in rude health.
HMRC’s statistics for the 2018-19 tax year have revealed that fundraising hit £716 million – the second highest level in the market’s 24-year history and the highest since the income tax relief rate was reduced from 40% to 30%.
This is all the more remarkable because it took place in the first year of major new rules for VCTs that require them to invest in higher risk companies than in the past. The risk to capital condition, established in March 2018 and requiring every pound invested to be at risk, might have been expected to deter investors from this route, but that has clearly not been the case.
Indeed, far from being put off, the figures show a growing number of individuals are now claiming the tax reliefs on offer under VCTs. There were 18,890 VCT investors who claimed income tax relief in 2017-18 (the latest year for which figures are available) – an increase of 24% on the previous year.
While this statistic could be skewed slightly as people sought to invest in VCTs before the new rules came into force, the fact that overall fundraising continued to rise to record levels is 2018-19 suggests that this has not necessarily been the case.
Of course, this positive outlook for the market is not a great surprise – figures from the Association of Investment Companies (AIC) published much earlier in the year pointed to an increase in fundraising that would see record levels achieved.
Nonetheless, HMRC’s statistics provide a welcome boost to the industry by demonstrating that the changes introduced in 2018 have not dampened demand for VCTs. They also underline the current appeal of investing in small businesses across the UK.
Of course, well-advised investors will also be aware that, for top-up offers where they’re buying into an existing portfolio, the less risky asset base will continue to be influential for some time while new, riskier assets are acquired by the VCT. As a result, it may make sense to invest now, while those older stocks remain in play.
The one dampener on the figures comes from the number of VCTs managing funds. This has now dropped every year since 2007-08, from a peak of 131 to 62 today. However, there are some good signs here, too, with the number of VCTs raising funds falling by only one – to 42 – compared to the previous year. That is still higher than the number of VCTs raising funds in 2016-17.
Indeed, it could be that some VCTs did not fundraise during 2018-19 because they were repositioning themselves following the introduction of the risk to capital requirement – or chose to wait a year to see how the market panned out. If this is the case, there could be more VCTs in the market in 2019-20.
We will have to wait until next year to see how that plays out, but this year’s overall figures are surely reason enough for small businesses looking for investment and VCT managers to treat themselves to a sherry and break out a mince pie ahead of the festive season.