How VCTs can play a role in retirement planning

Some of the statistics should make the investment industry proud of the contribution made by this investment product since their introduction in 1995.

The market for venture capital trusts (VCTs) is now mature and the type of investment opportunities available today are vastly different to when these schemes were first introduced. 

As the AIC reports, the impact of VCTs on UK smaller companies has been significant. For example, VCT funding has enabled UK businesses to more than double their turnover – according to the report, for every £1m invested, turnover has increased £2.2m. The economic contribution of VCTs shouldn’t be underestimated either. VCT investment has helped to create 27,000 new jobs. 

The AIC’s review shows that 54 per cent of all current VCT investee businesses have been held by those VCTs for longer than five years, while 20 per cent of all businesses have been held for more than a decade.

As we approach the second half of the tax year, more advisers will be looking to help their clients maximise the potential of their portfolios.

VCTs are by their nature designed to invest for the long term, and follow-on finance has played a significant part in the survival and growth of these early stage companies.

The AIC’s review found that 60 per cent of companies received more than one investment, while almost half (44 per cent) received more than two investments. Many firms highlighted that being able to rely on continued financial support was crucial to ensuring they could move to the next stage of commercial development. 

The investment case

From an investor perspective, the case for VCTs looks increasingly compelling, too. As well as offering access the growth potential of smaller companies that might otherwise fall below their radar, investors can claim a number of valuable tax incentives. 

Arguably the most valuable of these is income tax relief. Investors can claim up to 30 per cent upfront income tax relief on the amount invested, provided they are willing to keep holding their VCT shares for at least five years.

Investors are also eligible to receive tax-free dividends from VCT shares, although dividend payments are not guaranteed. Finally, should the investor sell their VCT shares and make a profit, the proceeds of the sale won’t be liable for capital gains tax. 

Of course, it’s always worth remembering that these tax benefits are there, in part, to offset the higher risk associated with investing in a VCT. And as with any investment, investors may not get back the full amount they invest. The tax treatment of VCTs is also something for investors and advisers to be acutely aware of.