They have provided patient capital to promising businesses since 1995.
At the same time, VCTs give investors a way to access the growth of smaller companies.
A British success story
The government set up VCTs to encourage investment into smaller companies, many of which might otherwise face a funding gap.
The combination of patient, sustained investment and specialist support from VCTs has helped transform the UK’s entrepreneurial ecosystem.
Through VCTs, early-stage companies have accessed funding and management teams that can help support them.
Since November 2015, VCT investment has fuelled entrepreneurship and supported businesses in need of scale-up finance, with 75 per cent of investment going into companies with annual sales of less than £3.6m, fewer than 49 employees and less than nine-years-old.
It is in this environment that talented entrepreneurs have created the likes of Secret Escapes, Tails.com and Zoopla.
It is also in this environment that many smaller companies have grown to benefit the UK economy.
In fact, companies backed by VCT investment have, to date, created more than 27,000 jobs and have driven economic growth, according to data from the Association of Investment Companies, June 2018.
Why invest in a VCT?
For those comfortable with the risks of investing in early-stage businesses, VCTs are a great way to access the growth of innovative smaller companies in the UK.
At the same time, they offer attractive tax reliefs, including 30 per cent upfront income tax relief on investments up to £200,000 each year, provided the investment is held for five years. There is also no tax to pay on any dividends or capital gains.
These reliefs exist to incentivise investors to take on the higher risk of investing in smaller, less established companies.
You can now access a VCT in an Isa wrapper
It has been observed that the customer base for VCTs is broadening.
Last year the move to offer the Octopus Titan VCT in an Isa was a logical step to making VCT investment as flexible as possible for customers.
With the Titan VCT offered within an Isa wrapper – via Isa transfer – there are even more ways for investors to access the benefits of a VCT.
A VCT Isa could be a good solution for those who want to invest within the Isa wrapper and, at the same time, invest in a VCT for potential growth and tax efficiencies.
Isa investors already benefit from tax relief on capital gains and on dividends, but VCTs also offer upfront income tax relief equal to 30 per cent of the amount invested (on investments up to £200,000).
Remember, investors have to hold VCT shares for five years or else pay back any upfront income tax relief claimed.
For investors comfortable with the risks the VCT Isa means that they can:
- Diversify their Isa by adding some unquoted equity;
- Gain exposure to early-stage companies with high growth potential;
- Claim upfront income tax relief.
Some risks to bear in mind
It is important to recognise that a VCT Isa is high risk and inherently different from other types of Isa, such as stocks and shares Isas, Innovative Finance Isas and cash Isas.
As with any VCT investment, clients need to be comfortable with the investment risks.
VCTs invest in smaller, less established companies which will not be suitable for all investors. VCTs are considered high risk, and clients may not get back the full amount they invest.
The value of a VCT investment, and any income from it, can fall as well as rise.
Investors should also be aware that the share prices of VCTs can fluctuate more than other companies listed on the London Stock Exchange’s main market. They can also be harder to sell.
Tax treatment depends on individual circumstances, and tax rules could change in the future.
Tax reliefs also depend on the VCT maintaining its VCT-qualifying status.
Paul Latham is managing director of Octopus Investments
