In Focus: Tax Year End  

How advisers can adapt to a shifting VCT market

  • To understand how VCT investing is evolving
  • To learn about the opportunities and risks associated with VCT investing
  • To understand how to use VCTs in the advice process
CPD
Approx.30min
How advisers can adapt to a shifting VCT market
The VCT market is shifting (Image credit: Jonathan Petersson, Pexels)

It is no secret that venture capital trusts have experienced success this year. So far, more than £800mn has been raised, already eclipsing the record of £779mn in 2005-06.

Changes to pensions taxation and rising inflation have certainly increased investment appetite, as has the opportunity to back high-quality exciting start-ups at attractive valuations.

But what is really driving the rising demand?

Rising demand for VCTs stems from a variety of factors rather than any single one.

The current economic climate is a significant contributor. With inflation hitting 5.5 per cent in January, the highest level in 30 years, and predictions suggesting it could reach as much as 8 per cent by April, investors are increasingly seeking alternative sources of income, not least because more will face the annual and lifetime allowance limits on tax-free pension saving.

The lifetime allowance is currently £1.07mn and has been frozen until 2025-26. The annual allowance is £40,000 but is tapered for high earners, effectively reducing the amount of money they can contribute to a pension. For every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.

In addition, with the 1.25 percentage point rise in tax on dividends and national insurance contributions fast approaching, tax relief is becoming a top priority for many investors.

VCTs present a tax-efficient investment solution by allowing investors to claim upfront tax relief worth 30 per cent of the amount invested, up to an investment of £200,000, and earn tax-free dividends and capital gains.

However, perhaps the most significant reason for this growing demand has been highlighted in recent data, which showed that the average age of the typical VCT investor has dropped by 11 years since 2017.

Data gathered by the Venture Capital Trust Association showed the average age of the current VCT investor is 56, down from 67 in 2017.

Shifting market

With the VCT market now more than 25-years-old, it presents a more reliable option as it has developed and matured.

There is now a core group of managers who have been able to demonstrate strong track records of delivering investor returns through multiple market cycles.

 

 

 

Investors can now access more mature and reliable portfolios while also having the opportunity to access new and exciting companies that will grow over time.

And the emerging younger investor may actually be more suited to VCT investment.

For example, these investors may have less pressing income requirement needs, as they are not planning for an immediate retirement, which may make the potentially irregular dividend payments of early-stage company investment a more suitable option.

What should advisers be aware of?

While this growing demand for VCTs is promising for advisers, this is not the VCT landscape they may be used to.

With increased amounts of money flowing into VCTs, there are a variety of considerations for advisers to manage these investments as well as a few pitfalls to be aware of.