As venture capital trusts (VCTs) across the UK welcome the final three months of the tax year, investors in these tax-advantaged investment vehicles could be in for another bumper round of returns.
On Monday, Baronsmead opened its £40mln VCT to investors, while Northern VCTs and Unicorn VCT have combined £33mln worth of offerings scheduled for the weeks ahead.
While the £546mln in funds raised in the 2022/23 season to date is down slightly year on year (unsurprising given the last year’s all-time record), the VCT market is 113% up on the 2020/21 period and around 96% up against 2019/20.
So while we might not hit a new record, it will be close.
According to high-net-worth investment service Wealth Club’s investment analyst Nicholas Hyett, VCTs have, on average, returned over 30% on initial investments over five years.
To put that into perspective, FTSE 250 is up less than 7% in the same period, while the AIM All-Share Index is down over 20% (both figures exclude dividends).
But why, in an underwhelming period for retail investors across the whole spectrum of asset classes, are VCTs enjoying a surge?
The growth and innovation play
“VCT sales as a whole are soaring, as a result of pension freezes on higher earners and increasingly punitive tax thresholds,” chief executive and founder of Wealth Club Alex Davies, alluding to Chancellor Jeremy Hunt’s dividend tax threshold reduction in the November budget.
“Northern and Baronsmead VCTs in particular have a legion of loyal investors and their offers are likely to sell out very quickly, but this is unsurprising when you consider how well they have rewarded investors over the years.”.
In a recent survey carried out by Wealth Club, 72% of investors cited tax as a reason for investing in VCTs; understandable given the 30% tax relief on offer for investments up to £200,000, plus tax-free dividends and zero capital gains tax.
These considerable tax relief bonuses create a £60,000 downside investment cushion from the get-go.
But there’s more to it than tax relief, contends Davies: “Investors are increasingly realising that growth and innovation are not likely to come from the large corporates you find on the main stock market, but rather from young, ambitious, and entrepreneurial start-ups.”
Generally speaking, VCT investors are of or nearing retirement age, so they’re driven by different factors than most other investors
“Our average investor age is typically 61… People who are drawing on their pension and can’t put any more into them, and VCTs are probably a first port of call” due to their inherent tax efficiencies, explains Hyett, adding that “market conditions are kind of secondary” to their reasons for choosing VCTs.
On that note, “we’re looking at a recession over the next 24 months”, Hyett predicted, “so the appeal for VCTs is that they have to invest in companies, and they have to invest in smaller companies seeking to raise money. That is the reason they exist, to provide funding for these groups”.
There is one other quirk in the VCT structure that has proved to be a goldmine in the past.
While the government places restrictions on the size of the company that a VCT can invest in – the company must have fewer than 250 full-time employees and gross assets below £15mln for instance – VCTs are not required to sell their holdings once a company exceeds these thresholds.
VCTs have a relatively high entry barrier, and you must hold your shares for at least five years to claim, but for willing investors, they can provide provably strong, high-yielding returns.