The new tax year is fast approaching and with it a series of changes to tax and allowances.
According to research from investment manager Wealth Club, these upcoming changes are pushing investors to consider more tax-efficient investments, such as Venture Capital Trusts (VCTs).
While these investments are certainly not suitable for all investors, their tax benefits, and exposure to smaller, faster-growing businesses, make them an attractive proposition for experienced investors.
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Here are some of the benefits of buying VCTs and the risks you need to look out for as well.
Boom time for the VCT industry
VCTs have been increasing in popularity for some time now as fiscal drag eats away at high-earners’ after-tax income.
Data from HMRC shows investors put £1.1bn into VCTs during the 2021-2022 tax year, a 68% increase from the year before and up 240% from the £325m raised ten years ago in the 2011-2012 tax year.
These investment vehicles invest in small, early-stage, often privately-owned companies, which tend to be riskier investments. So, to offset some of the risks, and encourage investors to fund the sector, the government offers generous tax relief on VCT investments.
You can invest up to £200,000 in VCTs per tax year and receive tax relief of up to £60,000.
Note that you must hold the investment for at least five years to keep the tax relief.
Additionally, VCTs dividends are also tax-free.
The table below, supplied by Wealth Club, shows what taxable dividend you would currently need to match different rates of tax-free yield:
| Row 0 - Cell 0 | Equivalent to taxable dividend | |
| Tax-free dividend | Higher-rate taxpayer | Additional-rate taxpayer |
| 2% | 3% | 3.2% |
| 5% | 7.4% | 8.1% |
| 7% | 10.4% | 11.3% |
However, while these tax breaks might look attractive, it’s never sensible to invest in something for tax reasons alone.
Indeed, any investment comes with risk, but VCTs are particularly risky. You could lose all of your investment, wiping out any tax savings in the process.
But VCT investing is not just about tax relief, says Alex Davies, founder of Wealth Club. “Investors are increasingly realising that growth and innovation are not likely to come from the large corporates you find on the main stock market, but rather from young, ambitious, and entrepreneurial start-ups,” says Davies.
“Not all will succeed but there’s now much more support compared to, say, 10 years ago – from incubators and accelerators to public and private funding – so they should have a better chance.”
With all of this in mind, here are three VCTs to look into before the end of the tax year.
Baronsmead VCTs
Baronsmead Venture Trust and Baronsmead Second Venture Trust are “two of the largest and most diverse of all VCTs”, says Davies.
They offer investors exposure to a portfolio of over 85 companies, including AIM-listed and private companies, early-stage growth investments and old-style management buyouts.
The trust is managed by Gresham House, which invests mainly in technology companies.
“The VCTs target an annual dividend yield of 7% of NAV – one of the most generous policies in the market – and have achieved this in each of the last five financial years,” says Davies.
British Smaller Companies VCTs
British Smaller Companies VCT (BSC) and British Smaller Companies VCT2 (BSC2) offer investors access to 35 companies, mainly providing business services. The largest holding is the business intelligence analytics platform Matillion.
“The VCTs don’t state a dividend target, but over the five years to 31 December 2022 paid total dividends per share of 38.5p (BSC) and 27.8p (BSC2).”
Octopus Titan VCT
Octopus Titan VCT invests in over 115 companies and has net assets of £1.1n. It’s the largest VCT in the UK, and one of Europe’s largest as well.
The VCT has a “long track record of investing in some of the UK’s fastest-growing technology companies, from Zoopla, the first $1 billion VCT-backed company, to fashion marketplace Depop and leading pet insurer Many Pets”, says Davies.
It’s targeting an annual dividend of 5p per share, and in the ten years to December 2022 has paid total dividends of 91p per share.
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