Why VCTs have come of age

There are rumours this investment could be becoming mainstream; that demand for venture capital trusts is increasing.

There are also apocryphal tales of investors going to extreme lengths to secure their “allocation” in this year’s best of the batch.

That’s all well and good, but to many, what they are; how they work; the different types; how to invest and how to divest are less familiar.

How did they come about?

VCTs were the brainchild of the then chancellor Ken Clarke. They were formed with the aims of encouraging direct private investment in listed investments, and at the same time creating a pool of capital to invest in the UK’s faster-growing small to medium sized businesses.

The rush not to miss out should not cloud investment judgement, so it is still worth considering the scale of the VCT raising the funds.

To attract the money, various incentives in the form of tax reliefs were given to the investors; and to ensure the money followed the policy initiative, certain conditions were imposed in the trusts.

The Money Advice Service highlights key features of VCT investment and taxation as follows:

You can invest by subscribing to new shares when a trust is launched or by buying shares from other investors when the trust has been established.

• You will get income tax relief when you buy newly issued VCTs, currently at the rate of 30 per cent on investments of up to £200,000 per tax year. This relief is provided as a tax credit to set against your total income tax liability and, therefore, cannot exceed your total tax liability for the tax year.
• You won’t get this tax relief if you buy existing VCT shares.
• You have to hold shares in a VCT for at least five years to keep the income tax relief – if you have to sell them before then, you’ll lose this benefit.
• You won’t pay any capital gains tax on profits from selling your VCT shares, no matter how short a period you have held them provided the company maintains its VCT status.

VCT market today

Today there are more than 80 VCTs with a combined value in excess of £3.5bn. While the average trust size is just over £40m, the individual trusts themselves can range from less than £10m to more than £400m in assets, with the median being in the range £60m to £80m. They tend to comprise 20 to 30 underlying investments.