In Focus: Tax Year End  

Why now is the time to invest in VCTs

Ewan MacKinnon

Ewan MacKinnon

As we approach the end of the financial year, there has probably never been a better time for investors to add venture capital trusts to their portfolio.

Investor appetite for tax-efficient solutions that support British businesses shows no sign of abating. Despite the wider uncertainty in global markets, VCTs’ 25-year track record of delivering robust, resilient returns underpins much of their current popularity.

Indeed, VCTs no longer carry the tag of an 'alternative' investment vehicle. They are a well-established part of the UK investment ecosystem. In the past decade, for instance, the top 20 VCTs have at least doubled investors’ money on net asset value total returns, according to research from the Association of Investment Companies.

They are well-trusted too. While the inherent risks of investing in VCTs must be acknowledged, their access to researched, managed, and diversified portfolios of early-stage companies make them an attractive option for many investors.

By investing in pioneering companies that are at the forefront of innovation, VCTs can deliver attractive returns that are uncorrelated to the performance of the wider economy. 

Moreover, previous global economic crises provide indicators that VCTs can support future recovery.

VCT activity resurged remarkably quickly after the 2008 financial crisis, with a fall from £230m in 2007-08 to £150m in 2008-9, swiftly followed by a jump to £340m in the following financial year. Activity has since continued on a general upward trend to this day, and this impressive record of resilience bodes well for investors.

VCTs can also accommodate the priorities of many current investors, such as an interest in sustainability or an appetite for opportunities outside the South East. The Maven VCT recently invested in eco-ethical baby care company My Pura, for example, which is based in Cheshire.

Providing essential support for the growth businesses that they back is a particularly important feature of VCTs, and helps explain much of the interest from investors, as these include some of the UK’s most exciting small and medium-sized enterprises.

In the UK, SMEs account for 61 per cent of employment and 52 per cent of turnover in the private sector, so sustaining this community will have a huge impact on the vitality of the economy as a whole. Indeed, having raised more than £9bn for funding SME growth, VCTs have supported hundreds of companies and created thousands of jobs.

This economic impetus will be particularly important for the UK as global macroeconomic and geopolitical events continue to unfold. And when recovery comes, it will most likely be driven by the young growth businesses that VCTs and their investors have backed.

Another driver of VCTs’ popularity is of course their tax efficiency, especially now that investors face an additional 1.25 per cent tax on share dividends from April, which could equate to 38.1 per cent for additional rate payers.