By 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, 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.
To help advisers and wealth managers gain a better understanding of VCTs, the AIC runs training sessions dedicated to the sector. These sessions are free and open to all. The face-to-face sessions are usually held in January and February and the AIC also offers bespoke training.
This piece has been published as part of the first Adviser’s Guide to Venture Capital Trusts. For the full guide click here