In Focus: Tax  

Q&A: How VCTs attracted the income-seeking investor

Before January 1, VCTs had to comply with EU legislation instead. This meant the government was not allowed to provide financial support beyond certain limits, with income tax relief regarded as state aid.

Now we have left the EU, we hope the government will continue to support VCT investing by allowing VCTs to provide more support to the emerging small businesses, especially in the context of the Covid-19 pandemic.

Coming out from under some of the state aid restrictions, such as increasing the amount that can be invested, would be a good first step.

FTA: What sort of developments might we see in the VCT space? 

DH: Developments take place in sectors where the pace of change is growing. At the moment, this includes areas such as cybersecurity, edtech and fintech, as they are all industries providing solutions to the problems the pandemic has created.

However, VCT managers are interested in all sectors where there is future growth through increasing market and customer adoption.

This undoubtedly incorporates clean energy, as well as businesses that are making a positive impact either on their community, the environment and wider society.

FTA: When should people be thinking about investing in VCTs – at the start of the tax year or towards the end of it, when other forms of tax-efficient investing may have been exhausted?

DH: Increasingly, VCTs tend to issue offers nearly all year round. The inflows to VCTs are much more consistent across the year, with summer perhaps the lowest point and there is still some bias towards the first quarter of a calendar year. 

However, this year many investors recognised that there was the widest choice of VCTs from September onwards and as the tax year end approached there was less and less choice. This trend started a few years ago and seems to be here to stay.

FTA: What makes VCTs appeal to income seekers?

DH: VCTs are appealing to income seekers because investments tend to have an up-front tax efficiency – especially for individuals who want to invest funds from September onwards.

As well as this, the tax-free dividends are very attractive to those wanting to make big returns on long-term investments.

Strong returns are also helped because VCTs typically invest in fast growth businesses within innovative sectors. For example, the 30 most valuable companies to graduate from VCTs created a combined value in excess of £12bn.

FTA: How does one balance the higher volatility, and often quite chunky fees, with the investment strategy of a VCT?