Why Investment in Venture Capital Trusts Are On the Rise



Posted on: 9th June 2023

It is true – there has been a surge in investment into Venture Capital Trusts (VCTs) over the last year, leading to speculation that this form of investment has been highlighted by independent financial advisers Manchester as beneficial for those looking to invest in higher-risk avenues for great benefits.

Although this may seem like a new scheme, VCTs have been around for nearly 30 years as a way to encourage investment in new companies. However, it has seen a dramatic rise in attention over the last year due to the benefits investors can gain from this option.

The VCT Lowdown

VCTs are public companies listed on the London Stock Market. They invest in smaller, innovative firms that struggle to raise funding from banks or other mainstream avenues.

VCTs are considered a much higher risk due to their investment in companies not widely established and just starting. They are considered long-term holdings and you would have to stay invested in shares for a minimum of five years. Investors can buy shares in VCTs through a stockbroker or specialist investment platforms.

Tax Reliefs and Rules

High earners love VCTs as it provides ways to reduce their tax liability. Investors that invest a maximum of 200k in VCTs each year have a 30% income tax relief benefit on a new investment whilst not being subject to capital gains tax when they choose to sell those shares.

The main benefit for most people comes down to the dividends being tax-free. Many VCTs aim to pay annual dividends of 5%, making it more attractive after the general tax-free dividend allowance was halved back in April.

Investors are required to put their money into new shares issued during a VCTs fundraising offer to benefit from the 30% income tax relief, with a period of five years holding that investment to retain that relief. VCTs will fundraise once or twice every year, with investors not able to buy new shares once the fundraising target or deadline has been met – although they can still do so on the secondary market without the initial tax relief.

Risks and Downsides

Of course, VCT investing comes with a larger level of risk as it could be years before a start-up becomes a profitable entity. If said start-up should go under, so would all of your investment into it.

VCTs try to avoid this by investing in many different companies to try and offset fewer failures against more successes. VCTs typically charge higher fees than mainstream investment funds or trusts, with an annual management fee of around 2% and initial charges likely higher. There is also a risk in selling a VCT holding as second-hand shares do not carry that upfront tax relief.

If you want to know the risks and rewards of venture capital trusts (VCTs), contact the team at Haven IFA today for independent financial advisers Cheshire that can fill in all blanks on your financial plans.