Venture capital trusts (VCTs), although only 20 years old, have gone through a number of regulatory changes with the latest being proposed in the summer Budget of the new government. Despite this upheaval, the sector has continued to provide consistent returns along with a tax-efficient way of investing.
According to the Association of Investment Companies (AIC), the total funds under management in VCTs increased from £3.2bn to £3.5bn over the year to 5 April 2015. A total of $429m was raised at the end of tax year 2015, the fourth highest level of annual funds raised ever and the highest amount raised in over nine years.
It is estimated that on aggregate, VCTs have raised £5.8bn since their inception. “It would be fair to say as an investment vehicle the VCTs have raised a lot of money and there is still a lot being invested by VCT managers,” says Will Fraser-Allen, deputy managing partner at Albion Ventures. “It has been pretty successful. The Treasury is very supportive of what we do and that is extremely important. The scheme has invested in a lot of businesses and produced pretty well established fund managers.”
April 2015 marked the 20th anniversary of VCTs’ creation and figures from the AIC show that the level of demand is at its highest since then. Also the VCT sector paid out aggregate dividends of £240.3m over the year to 31 March 2015, compared with £231.1m over the year to 31 March 2014. And data from the AIC reveals that the average VCT is currently paying an average yield of 8.2 per cent, with a generalist VCT yielding 8.8 per cent and an alternative investment market (AIM) VCT yielding 5.6 per cent.
VCT schemes invest mainly in small, private-up-and-coming companies with high potential for growth that need some financial support. They may be higher risk than conventional investment companies but they are viewed as long-term investments. VCTs also offer generous tax benefits. Previously VCTs were companies listed on the London Stock Exchange, but from April 2011 they were admitted to trading on any EU-regulated market, that includes all member states as well as EEA members Iceland and Norway.
In order for a VCT to function, it needs to be approved by HMRC once it has met certain conditions. This approval enables investors to qualify for the associated tax reliefs. HMRC also advises investors to seek professional advice before investing in a VCT.
Tax breaks
