VCTs in short supply for pension investors

published 7 December 2018

925_MW_P29_Pensions — Five Guys: a VCT success story

People looking for a tax-efficient place to invest may be disappointed.

Long-term savers hoping to maximise their tax-efficient investments could be caught out this year by a limited supply of venture-capital trusts (VCTs). VCTs which offer generous tax breaks to those prepared to put their money into a portfolio of small, early-stage companies have become an increasingly popular choice as tough new rules on pension contributions have been introduced. With the annual allowance on pension contributions now reduced from £40,000 to as little as £10,000 for higher earners, the number of investors subscribing for VCT shares has risen 40% over the past two years.

Demand will stay stable

However, with just four months to go until the end of the 2018/2019 tax year, VCT supply looks constrained. Around 15 funds are currently raising money, collectively seeking £350m from investors. To put that into context, VCTs raised almost £730m during the 2017-2018 tax year.

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There are likely to be more fund launches in the months ahead. Two familiar names, Northern Venture Managers and ProVen, are shortly to unveil new VCT offers, adding to the list of experienced managers already raising money, including Octopus, Downing and Hargreave Hale. However, with no reason to expect demand for VCTs to fall off this year, particularly given increasing restrictions on buy-to-let property tax relief, lack of supply could be a headache.

Indigestion now also appears to be a problem. VCT managers that have raised near-record sums in recent years have just three years to invest most of this cash in qualifying assets in order to retain the tax reliefs they offer investors. Also, changes to the VCT rules introduced two years ago have reduced the size of the investment universe, with managers no longer allowed to buy into larger, more established businesses.

So is this a case of buy now while stocks last? That would be a poor basis on which to make a long-term investment decision. While VCTs do offer generous tax breaks, including upfront tax relief and capital-gains relief, they're a riskier option than more mainstream investments. For every portfolio winner successes include GO Outdoors, Everyman Cinemas and Five Guys there have been disappointments too.

Still, for savers who want to use VCTs to complement their other tax-efficient investments, such as pensions and individual savings accounts, planning ahead and researching carefully makes sense this year.

Those who tend to leave their investment decisions until the final weeks of the tax year may find their VCT of choice has already shut up shop.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.