Investments  

Venture capital trusts have been reinvented

While share price volatility is not a good guide to risk in this case (it tends to be extremely low due to thin trading) the steady streams of tax-free dividends from many mature VCTs suggests that they have been successful in smoothing returns. That said, some VCT managers have highlighted that VCT rule changes since 2015 may make dividends lumpier in future.

The average VCT has returned 22 per cent over the past five years, excluding income tax relief, and 128 per cent over the last 10. In the past 12 months the sector has lost 3 per cent as the impact of the pandemic on the UK economy has been felt.

The non-financial returns of VCTs are harder to measure, but significant. Our research has estimated they have created 27,000 jobs by investing in high-growth businesses, but this is likely to be a substantial underestimate, as we do not have data on every single VCT-backed company.

With investors increasingly interested in the impact their money has, it is clear to see that £100,000 invested in a VCT is going to make incomparably more of a difference to the underlying businesses than the same amount ploughed into a UK or global index.

Advisers need to be discerning in their selection of VCT for a client. The array of options is not bewilderingly large – there are only 61 VCTs, and not all of these will raise money every tax year.

Basic information on VCTs is on the Association of Investment Companies’ website. Beyond this, a number of established companies offer independent research into VCT offers, looking at factors such as the strength of the VCT manager’s team, their record of successful exits, fees and charges, and the make-up of the existing portfolio.

Another important factor is the VCT manager’s buy-back scheme. Buy-backs give investors in VCTs an exit route – though they need to hold their shares for five years to retain all the tax breaks.

Buy-backs are usually done at a discount, and are not guaranteed.

The VCT sector has changed greatly in recent years. While assets in VCTs have almost doubled from £2.4bn in 2010 to £4.7bn this year, the number of VCTs has roughly halved over the same period.

This consolidation has been driven in part by the merging of VCTs, and the exit of some of the smaller managers from the sector.

Those that are left have generally been in the business for a long time, and have built extensive experience, earning advisers’ trust.

Assuming the restrictions on higher earners’ pension contributions are unlikely to be reversed, VCTs are likely to retain their importance as part of tax and retirement planning for wealthier clients.