What is a Venture Capital Trust?

Venture Capital Trusts explained

VCTs (Venture Capital Trusts) are investment companies that are listed on the London Stock Exchange and set up to invest in small UK businesses that meet certain criteria. To encourage support for these businesses the Government offers generous tax benefits for VCT investing. This also reflects the higher-risk nature of the companies they invest in.

What should investors be aware of?

Investors should not rely on VCTs to provide an income.

The value of VCTs, and any dividends derived from them, can fall to zero.

VCTs are designed for UK resident taxpayers. You must remain invested for at least five years to keep the tax credit, so VCT shares are also long-term investments.

VCTs may be difficult to sell at a price close to the value of the underlying assets or at the time of your choosing.

Because of the risks involved, VCTs should only be considered by experienced investors once other financial planning solutions have been fully explored and should only form a small part of your overall investment portfolio.

You should only subscribe for new VCT shares based on the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

What do VCTs invest in?

Venture Capital Trusts invest in early-stage businesses that are either unquoted or listed on AIM (the London Stock Exchange’s market for growth companies). These businesses need investment to grow and scale-up. They can potentially give you a high return, but they can also be much riskier than larger, more established companies as they can be more susceptible to economic and commercial headwinds.

There are strict rules on which companies are eligible for VCT investment. Each VCT will typically hold 20-70 of these companies, depending on the investment strategy and how long it has been running.

VCT tax rules and relief

VCTs offer several tax benefits to encourage investment into higher-risk companies. These tax benefits make VCTs popular among higher and additional-rate taxpayers – but remember, tax treatment depends on individual circumstances and is subject to change.

• Income tax credit
  
  30% income tax credit on investments of up to £200,000 each year when you buy shares in a new VCT share offer – but you need to have paid at least as much tax as the rebate and must hold the shares for at least five years
  
  
• Tax-free dividends
  
  There is no income tax to pay on dividends from VCT shares
  
  
• No capital gains tax
  
  You won’t be liable to capital gains tax when you sell your VCT shares.

History of VCT tax relief

VCT Strategies

There are a variety of strategies to be found on the VCT market. They all invest in smaller companies and give you tax relief, but they are different in their approaches to managing risk and reward.

Generalist VCTs

Most Venture Capital Trusts are Generalist VCTs. These typically invest in unquoted companies across a range of sectors, although some VCTs will also hold AIM-listed shares. Generalist VCTs will often specialise in particular sectors such as engineering, software, business services, or consumer goods and services.

Investments are usually made through a combination of ordinary equity and preference shares and may contain an element of loan notes.

VCT management teams often place directors on the boards of the unquoted companies they invest in. They monitor the investment and guide the business to an eventual exit – often a sale to private equity or a trade buyer, but sometimes a stock market listing.

AIM VCTs

AIM VCTs focus on companies that are listed on AIM – the London Stock Exchange’s market for smaller growth companies. Their management teams usually have a background in fund management rather than private equity investment. Unlike Generalist VCTs, investments are normally made through ordinary shares. AIM VCTs do not seek board representation and can only influence their portfolio companies through voting at shareholder meetings.

AIM VCTs are more volatile than Generalist VCTs because the shares of the AIM-traded portfolio companies are priced daily whereas unquoted companies are valued periodically.

AIM VCTs do have more liquidity because the shares of their portfolio companies are more easily sold on the market – unlike the holdings in a Generalist VCT.