Over the past decade, venture capital trust investing has grown in popularity.
This is partly to do with continued tweaking of tax rules around pensions and property investment – traditionally the mainstay of people's retirement plans – and the search for a tax-efficient vehicle to save within.
But as David Hall, chair of the Venture Capital Trust Association, says, there is more to a VCT than simply its tax-efficient nature.
He tells FTAdviser In Focus of the rising attraction of VCTs for income-seeking investors wanting to put their money into some of Britain's strongest performing small businesses.
FTAdviser: Why are VCTs becoming such an important part of pensions planning?
David Hall: There are a few cases where VCTs are attractive as part of long-term financial planning. Similarly to pensions, VCTs have a tax efficiency to them, in terms of both upfront relief and the tax-free income returns that follow.
Secondly, VCTs are income distribution vehicles. The conditions set for compliance with the ongoing VCT rules mean that trusts are forced to distribute at least 85 per cent of its net income as dividends.
While the dividend patterns across VCTs vary, it does mean that when considered over five to 10-year periods, investors often get a level of dividend income each year.
Finally, the investment is the property of the investors, so unlike buying an annuity, any capital value belongs to an investor’s estate.
FTA: Should clients invest in a VCT for the investment story or the tax benefit?
DH: VCTs provide an opportunity to invest in some of the most exciting, high-growth companies in the UK. Tax benefits are a reward for what are deemed more ‘risky’ investments.
However, VCT managers seek to focus on industries and companies that are likely to see growth in the medium to long term and build a diversified portfolio that goes some way to mitigating the risk.
From the government’s perspective, the tax relief provides a further mitigation of that risk.
As well as this, in the current climate, VCT investors will also be supporting the small businesses whose growth will underpin the country’s economic recovery.
This means people investing in VCTs are helping the UK build back and alleviate the economic scars the pandemic created.
We are hoping the government will recognise this and expand the limits of schemes such as VCT and EIS/SEIS funds, and increase tax breaks to make such investments more attractive.
FTA: Government policy so far has been to support VCT investing – will this continue?
DH: We hope so and the recent Kalifa report described VCTs as an integral part of the venture capital ecosystem and something that should be built upon.
For VCTs to optimise their economic impact for the UK, some alteration of our investment regulation created by the state aid rules would really help.