Venture Capital Trusts  

VCTs can help the UK’s productivity problem 

VCTs can help the UK’s productivity problem 
 

Venture Capital Trusts can help the UK’s productivity problem, experts have said, after welcoming the government’s decision to extend the tax relief for investors.

In the “mini” Budget earlier this month, the chancellor signalled the sunset clause that would stop the tax breaks available to VCT investors will be extended beyond 2025.

VCTs invest in higher risk unquoted companies and come with a 30 per cent tax relief if the investments are held for five years, with any dividends earned also tax free.

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The sunset clause was created as part of European Union state aid, and rules that VCT relief is only available to subscribers in the VCT for shares issued before April 6, 2025.

Head of tax advantaged strategies at St James’s Place, Luke Barnett, said: "[The point of these tax breaks] is that they help to facilitate investment into early stage companies who would probably struggle to get that money otherwise, at a point before they can access private equity funding or take part in an IPO.”

Furthermore, he said, this money will mean startups are able to invest not just in creating jobs, but in research and development.

“The clarity and certainty [of the government’s commitment to VCTs] will bring both to entrepreneurs and investors will help to support research and development, job creation and ultimately growth within the UK economy.”

Turning off the taps of VCT funding when the economy is most in need would have been “disastrous” for British business, said chief executive of Wealth Club, Alex Davies.

“The UK has a long-term productivity problem, and the key to solving that is investing in business and technologies that can deliver products and services more efficiently and more profitably. 

“These are exactly the kinds of businesses that VCTs support,” he said.

Research from Wealth Club in July showed that some £990mn in start-up funding could be put at risk if VCTs were shuttered.

A survey of 1,309 VCT investors, undertaken by Wealth Club between July 3 and 8 this year, showed that 90 per cent of respondents would either stop or be less likely to continue investing in VCTs if the income tax relief was reduced to 20 per cent.

An economic downturn provides good conditions for start-ups, said Will Fraser-Allen, managing partner at Albion Capital.

“In a recession you see a lot of good businesses set up, as the large corporates downsize their workforces you end up with a lot of good talent…these people are not necessarily going to jump into another corporate environment so that gives rise to people wanting to set up their own businesses.”

Pressure growing

Pressure had previously been growing on the government to confirm its stance on VCTs, warning that any further delay could impact the level of funds invested into the vehicles.

In his "mini" Budget, chancellor Kwasi Kwarteng said the government is supporting companies to raise money and attract talent, and remains supportive of enterprise investment schemes (EIS) and VCTs.