In Focus: Tax  

What's driving investment into VCTs post-Covid?


Venture Capital Trust investment has held its own this tax year, despite the pandemic and Brexit, according to Nick Britton of the Association of Investment Companies.

Speaking to FTAdviser in Focus, the head of intermediary communications for the Association of Investment Companies, said: "With their concentration on the UK economy you might have expected 2020 to be a bad year for VCTs."

Indeed, HM Revenue & Customs data last year indicated a drop in VCT fundraising in the last tax year (2019-2020), when inflows fell 4.3 per cent year-on-year, from £716m to £685m.

However, Britton says interest has subsequently picked up again, while returns from VCTs have been robust despite the impact of Covid-19 on the UK economy.

He said: "The average return was 4 per cent over the year, which shows more resilience than some of the FTSE 100 companies."

The reason for this is that most of these VCTs are investing in companies which are focused disproportionately on technology.

Britton said: "While some businesses have not done well, on the whole VCTs are more tilted to the sort of companies that have done well over the course of the pandemic, such as video gaming."

This has proved to be a good investment over the course of the coronavirus crisis, he added.

But when it comes to the reasons why people are buying into VCTs, Britton said it was about more than simply strong performance.

According to HMRC, more than £8bn has been raised in VCTs since their launch in 1995.

Much of the initial investment into these vehicles was due to the tax relief but, according to Britton, the biggest draw nowadays remains the introduction of the pensions annual allowance taper, which has placed limits on how much higher earners can save into their pension.

"VCTs enable [savers] to get pensions-like tax reliefs without breaching the pensions annual allowance", he said. 

Britton referred to the AIC's latest survey - as FTAdviser reported on March 11 - in which the majority of private investor respondents said they were saving into VCTs as part of their retirement planning. 

A "substantial minority" were saving for family reasons, perhaps for school fees or higher education. 

Add to this the fact many VCTs have track records dating back to the early days, which gives confidence to advisers and to clients, and these factors go some way to explaining why levels of fund raising have picked up despite the pandemic. 

Admitting the sector gave a "sigh of relief" when VCTs were left alone in chancellor Rishi Sunak's latest Budget (March 3), Britton also talked about various tax changes and consolidation in the VCT sector over the past few years.

Even so, Britton says there have been 31 different VCT offers in the 2020-21 tax year, from 18 different tax managers. As at the time of writing, 14 were still open.