Almost all advisers who allocate client capital to venture capital trusts (VCTs) do so with the tax advantages in mind, according to research from the Association of Investment Companies (AIC).
The researchers spoke with 154 advisers about their attitudes to the products and found of those who use VCTs for clients, 92 per cent said the tax relief was the “primary reason” for doing so.
Investments in VCTs benefit from a 30 per cent income tax relief if held for five years, while all capital gains from the investments, and all income received is free of tax.
But Venture Capital Trusts can only invest in unquoted companies, including companies listed on the Alternative Investment Market (AIM).
For the advisers who used VCTs, the typical amount invested in the products on behalf of each client was between £10,000 and 50,000, according to the data.
More than half of advisers said the major determining factor in their choice of VCT for clients was the length of time the VCT has been around.
Apart from the obvious ability to look at the track record of the fund manager, older VCTs tend to be at the stage where investments made many years ago are “maturing” and so there is greater certainty about returns.
Due to the tax breaks, there is no secondary market in VCT shares, that is, there is very little chance of selling them before the five years are up, because a buyer won’t get the tax break, so instead will buy newly issued VCT shares to avail of the tax break.
Chris Hutchinson, the long-serving manager of the Unicorn AIM VCT, said the fund raising climate hasn’t been particularly negatively impacted by the economic uncertainty this year, while he believes people are much more open to investing in early stage companies as a result of the pandemic.
John Davies, who runs the Seneca VCT, said many opportunities have arisen this year because some investors are saying to companies: “If you have any exposure to Covid in your business at all, we don't want to know, but we would be more flexible than that.”
Paul Latham, managing director at VCT provider Octopus, said fundraising across the range of the company's three VCTs has been “solid” this year, and has picked up markedly more recently, as clients have become more used to the world of the pandemic, having been wary when the crisis began.
He said the VCT sector as a whole raised about £700m of new capital every year, but “the opportunity is growing faster than that, there are a lot of companies starting up. And a lot of the changes in society will be permanent, and that helps smaller companies.”
He added that he finds less competition on good investments in the English regions.