Some £568 million has been invested into Venture Capital Trusts (VCTs) this tax year, representing a 4.3% rise year-on-year (£545m) and 16% more than 2023/24 (£491m).
There are currently around 20 VCTs are currently open to investments and more savers are expected to pile in ahead of major changes.
But experts are predicting an exodus after April, when one of the main incentives to invest will be curtailed.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
VCTs are a type of fund that invests in small, often early-stage, companies not yet listed on the main stock market. To qualify for VCT investment, businesses must meet certain criteria including having fewer than 250 employees and gross assets below £15 million.
Latest Videos FromMoneyWeek
Some investors believe VCTs are worth investing in because of the potential to achieve greater gains by backing fledgling firms, which often grow at a much faster rate than their larger counterparts.
But these are higher-risker investments compared to other popular funds among DIY investors, with a greater chance of failure. But to compensate for that, currently the government offers generous tax breaks. Investors can put up to £200,000 a year into VCTs and, provided they hold the shares for five years, get 30% tax relief, as well as tax-free dividends and capital gains.
But a major shake-up, announced in November’s Autumn Budget, will see the relief slashed to 20% from April 6. See our diuscussion on how the Budget will hurt you in our podcast - MoneyWeek Talks - which you can also watch on YouTube.
We look at if VCTS still be worth it and why you may need to act now to take advanatge.
Should you invest in VCTs?
In a survey of 512 VCT investors by the platform Wealth Club, some 84% said they would stop investing or invest less after the relief is cut.
Annabel Brodie-Smith, communications director of the Association of Investment Companies (AIC), which is calling for the government to reverse its decision, said: “It’s hard to square the decision to cut VCT tax relief with the government’s ‘pro-growth’ agenda. It’s a vital incentive for investors to risk their money and cutting it will impact businesses, which will struggle to find funding elsewhere.”
This is not unprecedented – VCTs have been tinkered with multiple times over the years. In 2003-4, the last time VCT tax relief was 20%, just £50 million was invested, according to the wealth manager Evelyn Partners.
When the relief was doubled the following year, the amount invested increased tenfold to £505 million, and rose to £779 million a year later. When the relief was cut to 30% in 2006/07, investment dropped to £267 million. By last year, investment levels had recovered to £895 million, but that could now be about to plunge.
Jason Hollands, managing director at Evelyn Partners, says: “Tax relief has long been the key driver of VCT demand because their track records can be patchy. Many investors will conclude that 20% relief is an insufficient incentive to entice them to back vehicles that invest in illiquid and high-risk companies.”
Other changes are more positive. The amount companies can raise through VCT investment in a single round will double to £10 million (£20 million for knowledge-intensive companies), and the “lifetime” amount they can raise will double to £24 million (£40 million for KICs).
It means businesses can attract more investment from the outset and raise more when they are ready to scale. If VCT managers put more into proven companies, this could improve returns and reduce risk for investors.
Rupert West, manager of the Puma VCT 13, says: “It means we can be a more valuable partner to the most attractive scale-ups and support our winners for longer, so investors get exposure to a more mature, better diversified portfolio over time.”
Some of Puma’s most successful VCT investments have included the snack brand Love Corn, the non-alcoholic beer company Lucky Saint, and Aveni, which provides AI solutions for financial services firms.
But there could be a downside, warns Andrew Wolfson, chief executive officer of Pembroke Investment Managers. If VCTs raise less money, and managers invest more in their existing holdings, then early-stage businesses could lose out. “As fewer funds are raised, fewer new investments are made, so less capital reaches the early-stage companies that VCTs were designed to support,” he says.
Pembroke VCT has successfully exited positions in the food company Pasta Evangelists and the fashion firm Me & Em. Recent new investments include the payments platform Ryft and customer experience software provider Serve First.
What are the alternatives to VCTs?
There are alternatives for investors who want more tax-efficiency than a VCT. Enterprise Investment Schemes (EIS) are an obvious place to look.
EIS invests directly into fledgling businesses. Investors may cherry pick individual companies themselves or there are managed funds, but these tend to hold only a handful of firms, compared with a VCT, which might invest in up to 100 companies. Either way, this is high risk and usually only for experienced, high-net worth investors.
Davies says: “The tax benefits of EIS have always been extraordinary. But compared with VCTs, they are very illiquid and, while you get the tax relief back quickly, returns can take a long time to come - if at all.”
Investors can put up to £1 million a year into EIS and get tax relief of 30%, as long as they hold the shares for three years. From April, the amount that can be invested in EIS companies will also be doubled to £10 million. This could mean managers start targeting bigger businesses, which could reduce risk and improve returns.
Seed Enterprise Investment Schemes (SEIS) offer even greater tax relief of up to 50%, but involve investing into the tiniest of start-ups - companies must be less than three years old, have fewer than 25 employees and gross assets below £350,000.
Hollands is sceptical that either EIS or SEIS are appropriate for many people. He warns that they are not a straight swap for VCT investors seeking a tax-efficient alternative.
But VCTs are not yet down and out. For investors with the risk appetite, the prospect of fast growth and the chance to own a slice of the Next Big Thing, means they still merit consideration, says Davies: “The fundamental investment case for VCTs still stands; if you want to back fast-growing UK companies, you need to look at them.”
He likes the Octopus Apollo VCT, which is up 54.8% over five years, according to the data provider Trustnet. “It is pretty dull and invests predominantly in B2B software companies that are generally later stage,” says Davies. Its investments include smart thermostat firm Switchee and human resources tech provider Sova.
Hollands likes the Albion Enterprise VCT, which has returned 50% over five years, and is skewed towards software and healthcare companies. Its largest holdings include weight loss medication firm Oviva and Runa Networks, which provides technology for digital gift cards.
VCT investment may take a hit from April as savers digest the changes, but in this dynamic part of the market, tax relief is not the only reason to invest - consider it, instead, as the cherry on the cake. And, given past tinkering, there is always the chance that the tax relief could be raised again in the future.
