Venture capital trusts that offer growth, income and tax relief

The chancellor has finally admitted that “further measures on tax” will be announced in the Budget on 26 November. “Those with the broadest shoulders” – the ever-growing number of higher- and top-rate taxpayers – are likely to bear the brunt of it. Meanwhile, pensions, traditionally a bastion of tax efficiency, have begun to look less appealing, thanks to limits on what you can contribute, restrictions on tax-free cash and the prospect of death taxes of up to 67% following changes in the last Budget.

Against this backdrop, venture-capital trusts (VCTs) look startlingly attractive. When you support young British companies by investing in VCTs, you could receive up to 30% income-tax relief – a tax break of up to £60,000 if using the full £200,000 VCT allowance. In addition, any dividends VCTs pay are tax-free. This could be particularly valuable now the dividend tax-free allowance is at a historic low of £500.

And despite the economic woes of the past few years, VCTs have continued to deliver a regular stream of dividend payments. Over the last five years active generalist VCTs have on average paid dividends totalling 32% of the starting net asset value (NAV), rising to 68% over ten years. No wonder, then, that experienced investors keep on turning to VCTs.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Venture capital trusts to consider

The long-established British Smaller Companies VCTs have been a favourite among investors for years. This year, British Smaller Companies VCT (LSE: BSV) and British Smaller Companies VCT 2 (LSE: BSC) raised £9.5 million in the first 24 hours of the offer opening. The two VCTs target business-services companies. The portfolio includes some impressive outfits such as Unbiased, a platform that reviews financial advisers and is expanding rapidly in the US. Another investment is digital special-effects studio Outpost VFX, which has worked on projects such as Captain America: Brave New World and The Lord of the Rings: The Rings of Power. Over the five years to September 2025, the VCTs have paid cumulative dividends equivalent to 40.9% (BSV) and 43.0% (BSC) of the starting NAV of each VCT.

Consider also the three Northern VCTs: Northern Venture Trust (LSE: NVT); Northern 2 VCT (LSE: NTV); and Northern 3 VCT (LSE: NTN). They target more established firms with growth potential. Manager Mercia’s sweet spot is regional businesses (more than half of the portfolio is outside London and the South East) in the healthcare and technology sectors. This is an area where Mercia is achieving success after success. The latest example is The Beauty Tech Group, which allows people to apply beauty techniques such as laser therapy at home. It floated last month at a £300 million valuation. The VCTs target annual dividends of 4.5% to 5% of NAV. Over the five years to September 2025, the VCTs have paid cumulative dividends worth between 29% and 35% of starting NAVs.

The Triple Point Venture VCT (LSE: TPV), meanwhile, brings something different to the table. It’s a newer VCT and it targets earlier-stage companies. That is when competition, and consequently valuations, tend to be lower and the potential returns higher.

And this approach is starting to bear fruit: the VCT already bagged a high-profile exit when credit-checking platform Credit Kudos was acquired by Apple just two years after Triple Point invested. The VCTs target an annual dividend of 5% of NAV. Over the five years to September 2025, the VCT has paid cumulative dividends equivalent to 15.6% of the starting NAV.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.