Albion Capital, a venture capital trust provider, surveyed 250 individuals with annual incomes above £125,000 in May, and found 50 per cent had not heard of the products, while 76 per cent of those surveyed had never invested in VCTs.
A third of those surveyed said they would consider investing in the products if they were recommended to do so by a financial adviser. The number one reason people did not currently invest in the products was a lack of knowledge, it emerged.
Venture Capital Trusts (VCTs) are investment funds listed on a recognised stock exchange that invest in unquoted companies.
Investors who hold the shares for five years receive a 30 per cent income tax break, while any income earned from the investments in the trust is exempt from income tax.
The Treasury changed the rules last year around the types of companies into which VCT managers deploy capital, as it wanted the products to focus on riskier assets, saying they had not always been used as intended.
Will Fraser Allen, deputy managing partner at Albion Capital, said: "VCTs have entered the mainstream in recent years as a steady erosion of other tax efficient means of saving and investing has boosted their popularity.
"We were surprised by these findings, which suggest a relative lack of knowledge of VCTs’ qualities and indicate more work needs to be done to raise awareness of the tax benefits, income potential and opportunity to support exciting UK growth businesses."
But Richard Hoskins, who co-founded Kin Capital, a firm engaged in the marketing of VCTs, said the relative lack of awareness was not a surprise to him.
He said: "Not enough advisers are fully aware of VCTs. There is a perception they are very, very high risk, but while they are never going to be a product for widows and orphans, if you buy a range of VCTs then the risks are lower."
He added concerns over the implications for their indemnity insurance may be another reason advisers are reluctant to recommend VCTs, while the fact an investor in the products must remain invested for five years imposes a "discipline" on investors which some may find unappealing.
Risk in VCTs has recently been in the spotlight due to the Packaged Retail Investments and Insurance Products (Priips) rules, which require product providers to include a summary risk indicator.
The risks of investment products must be rated on a scale of between 1 and 7, with many VCTs, using the methodology prescribed by the regulator, being granted a risk profile much lower than most of the industry believe is appropriate.
This is because the risk indicators measure the volatility of an asset price, not the underlying risk of the asset falling in value.
Because VCTs typically invest in businesses that are not quoted on a stock exchange, the assets are priced infrequently, so there is little price volatility, making them appear less risky than they are.
Francis Klonowski, an adviser at Klonowski and Co, an advice firm in Leeds, said he tends not to recommend VCTs as, in his view, the underlying investments perform poorly. He said he is reluctant to invest in anything purely for the tax advantages.
david.thorpe@ft.com
