How to successfully invest in VCTs

Generalist VCTs invest via loan notes, preference shares, or equity in the business.

An Aim VCT is what it says on the tin: it focuses on companies listed on the smaller companies' stock exchange in the UK. 

The main difference between Aim VCTs and generalist VCTs is the potential volatility in the share price of Aim firms. These are more liquid however, as the shares are traded on an exchange.

Some advisers in the space don’t like Aim stocks because of the volatility that comes with it.Matt Currie, Seneca Partners

“One of the main attractions of investing on Aim is liquidity,” says Matt Currie, investment director at Seneca Partners.

The average size and scale of businesses on Aim is also typically larger and they often raise additional capital compared to private companies, he adds, which means that they have a longer cash runway on which to execute their business plan. 

There are some drawbacks, however.

“Some advisers in the space don’t like Aim stocks because of the volatility that comes with it and the fact that the investors have real-time visibility of that,” Currie says.

There are also specialist VCTs, which will focus on a small part of the market.

How do I invest in a VCT?

There are two ways to invest in a VCT. 

Most share offers are from existing VCTs, to top up their funding with an additional fundraise.

However, sometimes new VCTs launch, seeking funding for a new portfolio.

Consumers can invest directly through an online broker, or through an IFA (which most VCTs recommend in order for potential investors to ensure it is the right investment for them).

For instance, Octopus Investments launched its first VCT in a decade last year, offering investors an initial £20mn in shares to back innovative companies with a focus on sustainability.

To take full advantage of the tax breaks, Jonathan Moyes, head of investment research at Wealth Club, says investors should re-invest any dividends they receive from the VCT.

“You get paid a dividend tax free, then when you reinvest the dividends you would get an additional 30 per cent in tax relief.”

When looking for a VCT that is likely to pay dividends, an underlying portfolio that is fairly mature and is well diversified has more chance of paying a more consistent dividend than a VCT that gets lucky, says Moyes.

How do I research VCTs and their managers?

A good place to start when researching a VCT is the Association of Investment Companies’ website.

The AIC is the industry body for investment companies which includes VCTs, lists every trust on its website, and details total assets, price, net asset value, performance, dividend yields and fees.