Venture Capital Trusts  

Tax rules funnel investors towards VCTs

Tax rules funnel investors towards VCTs
Credit: Chris Ratcliffe/Bloomberg

The amount of cash invested in venture capital trusts is on course to outstrip last year’s total as the market continues to benefit from the tightening of pension restrictions.

Data from Wealth Club shows the total amount raised by VCTs for the current tax year stands at £360m — slightly higher than the £356m raised by this point in the 2019-20 year.

Just last week, some £33.5m was pumped into the investment vehicles, which was 76 per cent more than the equivalent week in 2020 and higher than any week last year.

Alex Davies, chief executive of Wealth Club, said: “VCT demand has been buoyant, and has now outstripped the total amount raised at this point last year. 

“With less than two months to the end of the tax year, unless there are any nasty surprises, VCT sales this year should beat last year overall.”

Source: Wealth Club

The fastest-selling VCT this year was Albion's, with £1.25m raised per day since opening, alongside the Unicorn AIM VCT, which investors have piled £1m a day into since it opened 11 days ago.

The British Smaller Companies VCT, the Octopus Titan VCT and the ProVen VCTs also feature in the top five fastest sellers.

VCT OfferDays offer has been openAmount raised per day
Albion VCTs34£1.25m
Unicorn AIM VCT11£1m
British Smaller Companies8£975k
Octopus Titan VCT110£736k
ProVen VCTs67£382k
Source: Wealth Club

Jess Franks, head of tax at Octopus Investments, said the most important factor driving demand for VCTs was the tightening of pension restrictions.

She said: “We know that the lifetime allowance affects a growing proportion of advisers’ clients and this has encouraged them to look at other tax efficient alternatives as part of their portfolio.

“Even if you have a client in their mid-40s whose current pension pot is significantly below the lifetime maximum, when you consider the impact of another 20 years of growth and contributions, the lifetime limit can feel relevant.”

Davies agreed, noting that in 2010, it was possible for higher earners to put as much as £255,000 into a pension each year with a lifetime allowance of £1.8m.

Now, the lifetime allowance sits at just over £1m and higher earners are restricted to as little as £4,000 a year into a pension pot.

VCTs are like investment trusts but only invest in small, young and typically unlisted companies.

Although such companies are riskier and statistically more likely to go bust, investing in a VCT comes with a 30 per cent income tax relief from the government and returns are tax free.

Ongoing trend

The popularity of VCTs has only increased over the past decade, with the amount of cash pumped into the trusts doubling from £338m in 2009-10 to the £685m invested in 2019-20.

Last year’s total was slightly lower, primarily due to the coronavirus crisis beginning in the lead up to the tax year end.

Davies said: “With a generous and simple allowance of £200,000, VCTs have become the obvious pension replacement. 

“In addition to being highly tax efficient, they have proved a good investment for many, and due to rule changes a few years ago are now brimming with fast growing tech enabled businesses – exactly the type of businesses that are popular with investors.”