are vcts worth it

Are VCTs Worth the Risk?



Posted on: 6th January 2022

Are VCTs worth it? Venture Capital Trusts has been enjoying a certain boom period for demand with flocks of investors lured by the glorious tax breaks, as well as the ability to pour interest into growing, exciting businesses.

The total invested into VCTs rose from an annual £350m a decade ago to £635m a year. The main motivation has been centred around pension rules, although managers have indicated that a VCT investor is getting younger. The reason for this shift is within the attraction of the tax relief offered and the trust’s backing of unlisted early-stage businesses.

In return for this higher risk investing in future driver companies for economic growth, investors stand to get up to 30 per cent income tax relief and tax-free dividends.

What are VCTs?

VCTs are investment companies listed on the London Stock Exchange that raise money from investors to invest in young, privately-owned companies not listed on the stock market or listed on the junior market Aim.

When someone invests in a VCT they become a shareholder of the trust itself, giving them exposure to any investments the VCT makes after the investment as well as the existing portfolio. VCTs were introduced in 1995, as a way to offer generous tax breaks and become a well-established alternative for experienced investors.

There are two forms of VCTs – Generalist and Aim. Generalist is the most common form which invests in small, private companies in a range of sectors and not listed on the stock market. These focus on diversification across early-stage companies, which work with them to grow and succeed.

Aim VCT invests in new shares from Aim-listed companies, targeting tax-free growth as well as income. Whilst they invest in stock market listed forms, the price can be more volatile due to the companies valued daily other than periodically. There is more flexibility for them to enter or exit investments due to ordinary shares being easier to sell on the market.

Worth the Risk?

Are VCTs worth it? VCT investment is long-term and not for everyone. Anyone investing needs to be aware that long-term thinking is required, as years could pass for successful investments to pay off and the potential for those that fail to result in a total loss of money.

VCTs are for experienced investors who don’t demand immediate liquidity and can withstand a potential loss. Demand has been driven by pension rules change, placing further restrictions on amounts that can be invested into personal pensions both annually and over a lifetime. Advisers are using VCTs to compliment retirement planning in situations where clients are at risk of breaching their lifetime allowance.

For more information on VCT Manchester and ways to relieve taxes through investment advice Manchester, contact the team at Haven IFA today.