Venture Capital Trusts 

Why VCTs have come of age

  • Learn about the history of venture capital trusts, or VCTs, and how they invest.
  • Understand what the VCT market looks like today and why.
  • Grasp whether VCTs are becoming more popular and what is driving that.
CPD
30min
Why VCTs have come of age

This month marks the 21st year since venture capital trusts (VCTs) allotted their first shares and started investing in UK small businesses.

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.

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. 

They generally raise around £400m each tax year, with the bulk of the fundraising being launched around calendar year ends, with the majority of investments made in the January to March periods prior to the tax year end.

Fundraisings are usually undertaken by existing vehicles which means that incoming investors get immediate access to an invested portfolio and any income that it produces.

It is estimated that around 20,000 people a year invest in the trusts, with the average amount usually just below £20,000.

What do VCTs invest in?

As mentioned earlier, VCTs were initially established to invest in the UK’s unquoted small businesses and that’s where the focus remains.

They are a major source of what is today called “scale-up” capital. Businesses receiving investment tend to be less than seven years old (10 if they are deemed “knowledge intensive”). The businesses have also achieved a degree of market penetration and sales, so generally they are not start-ups and have some infrastructure, but need to invest to support the sales growth they are experiencing.

Recent well-known examples of some of the types of businesses include Zoopla, GoOutdoors and Swiftkey, but there are many more less well known in sectors as diverse as engineering; medical supplies; logistics; cable manufacture to name but a few.

Comments

CPD
30min
  1. There are now more than 80 VCTs today with a combined value in excess of how much?

  2. VCTs invest in the UK's unquoted small businesses and are considered a major source of what type of capital?

  3. Due to changes to VCT investments, what will happen to dividend performance in the medium term?

  4. Which one of these is not a reason for the rising popularity of VCTs?

  5. How many people are estimated to invest in VCTs each year?

  6. One of the rule changes made in October 2015, and which was put into the 2015 Finance Bill means VCT money can no longer be used to what?

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