It’s the time of the year when investment houses start to reopen their Venture Capital Trusts so let’s spend a little time exploring what Venture Capital Trusts (VCTs) are and why they might make up a small part of a much larger portfolio.

VCTs were introduced in 1995 to encourage investment in unquoted smaller, higher risk trading companies. The Association of Investment Companies report that “VCTs raised just shy of £1.1bn in the 2022/23 tax year… with around 15 funds announcing new offers over the past month or so”.

A VCT is essentially a company (listed on the London Stock Exchange) that looks to make money by investing in privately owned companies which have significant growth potential. These smaller companies tend to need injections of capital to help them expand but may have limited cashflow or an inability to raise finance in a more traditional sense. VCTs make money via participation in profits and by charging management fees.

So, what’s so special about them from an individual investment perspective?

• VCTs offer investors 30% upfront Income Tax relief on the amount invested, provided the VCT shares are held for at least five years
• Return of capital (and profits) is usually by means of a regular tax-free dividend which provides investors with a source of tax-free income. Many VCTs target a 5p dividend (per share) each year
• Any profits made on sale of the VCT shares are not subject to Capital Gains Tax, albeit VCTs aim to return investment performance back to shareholders in the form of tax-free dividends
• As VCTs are listed, the shares can be sold. This means that for as long as the shares in the VCT have been held for the five-year minimum period (to retain the initial Income Tax relief), it is possible to sell the shares and reinvest the proceeds into a new VCT (enjoying a further 30% Income Tax relief in doing so)
• Investment in VCTs can offer investors the opportunity to invest in something a little less vanilla while also helping small British businesses grow. However, investing in smaller companies carries greater risk and it is possible to lose money. Some small companies will do very well and others will fail, therefore, investment in VCTs should only be considered for a small part of a larger portfolio

The target audience for a VCT is someone who:

• Can commit to investing a minimum of £10,000 for at least five years
• Is willing to take risk with this investment
• Does not need access to this investment in the short-term
• Has an Income Tax liability of more than the tax relief available from the VCT investment
• Has other liquid assets so that this investment only represents a small portion of the overall portfolio
• Has potentially exhausted pension allowances
• Needs (or values) having a source of tax-free dividend income

What Next?

If you would like to discuss VCTs further, please contact your usual adviser.