How VCT investing has developed

This article is part of
Guide to VCT investing

How VCT investing has developed

Venture capital trusts (VCTs) have been around since 1995, when John Major's government decided to offer tax breaks to encourage people to invest in early-stage UK companies.

As Annabel Brodie-Smith, communications director for the Association of Investment Companies, comments: "VCTs were a bold initiative to encourage the public to invest in small businesses with the capacity to transform the markets they operate in."

But with Isas not even a gleam in the future Labour Party's eye, the idea of a tax-incentivised, potentially higher-risk investment scheme seemed a little bit too esoteric, and VCTs were targeted mainly at the more sophisticated investors in UK society.

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Now, however, investors with just a few thousand to spare can get into the venture capital trust market and benefit from generous tax allowances.

Initially, as Alex Davies, chief executive of Wealth Club, states, VCTs were a "bit of a rollercoaster" in terms of performance and management.

He explains: "While there were some great performers, which have continued to be so, such as Baronsmead, British Smaller Companies and Northern, performance from some others was truly terrible." 

But now, they are seen as well-managed, credible investment schemes. As the AIC points out, the industry has grown to £4.1bn in size.

Paul Latham, managing director of Octopus Investments, comments: "People are increasingly looking to VCTs to provide them with a credible way of investing in a tax-efficient manner."

So what are VCTs and how are they developing?

In a nutshell, according to the Association of Investment Companies (AIC), which covers VCTs, there are three main types of VCT, although the management styles of each can vary.

The three types are:

■ Generalist (which covers private equity including development capital).

■ Alternative Investment Market.

■ Specialist sectors, for example technology or healthcare.

Some VCTs had a fixed investment term for investors - before which they could not get their money out. These are called planned exit VCTs, compared with 'evergreen' VCTs which have no such maturity date - but which have in the past been seen as more expensive for investors to dive out of.

In terms of tax, investors in VCTs receive 30 per cent income tax relief when their money is put to work investing in underlying UK companies. Investors also benefit from not having to pay capital gains tax (CGT) on any investment returns.

Mr Latham says: "Recognising that investing in such companies involves taking more risk than investing in larger listed companies, and that VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange, investors were offered tax reliefs in order to incentivise investment."

According to Mr Latham, VCTs have raised more than £7bn, helping to create jobs, reward innovation and bolster the UK economy. 

VCTs have always been able to invest in Alternative Investment Market (Aim) qualifying companies but the government agenda is to push VCT managers further down the capitalisation curve towards more early-stage companies than before.