In the long term, the now former chancellor’s decision to extend the tax relief scheme beyond its original 2025 sunset clause will help maintain the positive momentum the sector has built up over the past couple of years.
Looking ahead, the salience of VCTs in the UK’s funding ecosystem is only set to increase as geopolitical and economic uncertainties attract investors looking for a way to invest in the future of Britain's small and medium-sized enterprises, while capitalising on the vital tax relief benefits they continue to provide.
Funding the bedrock of Britain’s economy
During this period of heightened uncertainty, the government has been right to extend this form of tax relief. The VCT sector has proven itself to play an instrumental role in the UK’s funding ecosystem.
With banks and private equity investors focusing on larger businesses, and venture capital and angel investors solely backing companies at the very early stages of their development, VCTs are one of few investment vehicles on the market capable of effectively address the funding gap faced by many SMEs.
Since they launched in 1995 VCTs have played a pivotal role in the UK’s economy by supporting those that would otherwise fall through the cracks. Indeed, since 2018, VCTs have been responsible for more than £1.7bn of investment into more than 500 different SMEs.
The extension of the sunset clause will enable VCTs to remain as one of the most efficient solutions in providing tax-free dividends.Continued support for the scheme will undoubtedly help provide funding to thousands of SMEs by continuing to drive private capital towards the industries that need it the most. Supporting these business helps to provide growth, jobs, and innovation in sectors that are critical to scaling up the UK’s economy.
Indeed, SMEs account for 61 per cent of employment and 52 per cent of turnover in the private sector. The success or failure of these businesses in the coming years will ultimately impact the UK’s economic outlook.
At a time when the future of the economy remains uncertain, with the pound’s value and consumer confidence reaching all-time lows, the schemes continuation shows that the government recognises VCTs are at the heart of supporting Britain's entrepreneurial drive.
Matching investors’ needs
For investors, the extension of the 2025 sunset clause will enable VCTs to remain as one of the most efficient solutions in providing tax-free dividends and the much-needed income stream that many investors are looking for amidst growing instability within the markets and rising inflation.
With inflation at a 40-year high, and the Bank of England facing an uphill struggle as it continues to rise interest rates, tax relief could become a priority for investors facing increasing economic pressures.
Supporting these technology start-ups will be a vital component in the scaling up of the UK’s economy.This move by the government ensures that VCTs will continue to operate as the most efficient investment vehicle for delivering investors an efficient and competitive income stream. VCTs can provide an upfront tax relief worth 30 per cent of the amount invested, up to an investment of £200,000, allowing investors to earn tax-free dividends and capital gains.
Considering that 72 per cent of VCT investors cited tax breaks as their main reason for investment, these tax-free dividends could become an increasingly key component of an investor's portfolio in the months ahead.
Investing in innovation
Other than the crucial tax relief advantages that will help investors in the difficult months to come, VCTs also provide the opportunity to support and capitalise on some of the UK’s most innovative companies.
VCT investments offer start-ups and SMEs access to the fast and flexible funding they need to compete during the early stages of their lifecycle. This vital injection of capital can then be deployed to prioritise research and development and allow these businesses to realise their potential and shape their respective industries.
In the face of changes affecting pensions, VCTs continue to offer investors a very attractive supplementary pension planning option. For investors to truly capitalise on the benefits of investing in these businesses, VCTs have adopted a variety of strategies capable of identifying start-ups and SMEs that have the potential to survive and thrive in an increasingly competitive marketplace.
For example, Triple Point’s Venture Fund VCT uses a challenge-led approach that identifies the UK’s most dynamic pre-Series A B2B technology businesses.
With high-growth B2B technology businesses accounting for more than 75 per cent of all exits in 2019, the sector can offer the opportunity for attractive returns for investors.
Supporting the UK on the road to recovery
Supporting these technology start-ups, and the wider SME sector, will be a vital component in the scaling up of the UK’s economy. With fears of a future recession looming over the financial sector, the VCT announcement is a silver lining in the storm whipped up by Kwarteng's speech.
In the face of changes affecting the pensions space in the UK, including the tapered annual allowance and the closing up of lifetime limits, VCTs continue to offer investors a very attractive supplementary pension planning option.
Encouraging investors to incorporate VCTs into their portfolio could be one of the best decisions the now former made.Their record of providing robust and resilient returns will push more investors towards the sector in the aftermath of Kwarteng's announcement.
Continued clarity around the future of VCTs will allow the market to continue to flourish and accelerate VCTs’ move towards a mainstream asset class and an essential in any adviser's arsenal.
Amidst the constantly changing economic landscape within the UK, businesses that can adapt and evolve to meet these challenges will emerge from the incoming recession as some of the key movers and shakers within the UK economy.
The government's decision to extend the tax relief for VCTs is a vote of confidence in VCTs as a vehicle to deliver crucial investment to the UK’s most dynamic and successful SMEs.
Encouraging investors to incorporate VCTs into their portfolio could be one of the best decisions the now former chancellor made.
Jack Rose is strategic sales director at Triple Point
