Venture Capital Trusts (VCTs)

Venture Capital Trusts (VCTs) are investment vehicles that give individuals the opportunity to support and benefit from the growth of emerging companies. Investing in Venture Capital Trusts is incentivised with tax benefits, such as income tax relief, plus tax-free dividends and capital gains. This tutorial covers what VCTs are, how to invest in them, plus their advantages and disadvantages. We have also listed the best UK brokers with Venture Capital Trusts.

What Is A Venture Capital Trust?

Venture Capital Trusts allow shareholders to invest in small companies in the UK to support their growth.

VCTs and Enterprise Investment Schemes (EIS) were introduced in 1995 by the UK government as a way for smaller companies to draw in investment. As these are risky investments, the scheme offered benefits such as income tax relief and tax-free dividends to encourage participation.

Since launching the scheme, over £10,800 million has been raised through VCTs. In the 2021/2022 tax year, £1,120 million worth of shares were issued.

How Venture Capital Trusts Work

When investing in a Venture Capital Trust, you are pooling your money together with other individuals through a firm such as Interactive Investor.

Typically, this happens via a share issuance that provides individuals with the chance to own a portion of the underlying portfolio. This money is then used to invest in numerous small companies that are either unlisted or on the Alternative Investment Market (AIM), which is a sub-market of the London Stock Exchange (LSE).

The objective is for underlying companies to grow and generate regular dividends for investors. Once the company has grown sufficiently, the shares are sold for a profit.

As with other types of pooled investment vehicles such as mutual funds, Venture Capital Trusts are controlled by fund managers. These are professionals that investigate and identify suitable investment opportunities, aiming to find the most promising companies that satisfy the fund’s criteria.

Qualification Criteria

The UK government imposes strict rules regarding which companies can qualify for investment via a VCT. Requirements include:

• Fewer than 250 full-time employees (or 500 if the company is considered ‘knowledge-intensive’)
• Gross assets summing to less than £15 million before investment
• Less than 7 years of age (though some exceptions apply)
• Permanent establishment in the UK

There are also caps on the amount that can be invested into a single company both yearly and over a lifetime.

Often, individual VCTs will also have inclusion requirements for companies, for instance, there may be restrictions on the industries that companies are a part of.

Classification

There are four main types of VCT:

Generalist

Generalist Venture Capital Trusts are highly diversified investments since funds are split across a range of sectors.

These are the most common type of VCT and are ideal for those who want exposure to several industries. One example is the Blackfinch Spring VCT PLC offered by Interactive Investor. The portfolio supports the transport, HR, software, property and advertising sectors, amongst others.

Specialist

Specialist Venture Capital Trusts are less diversified, concentrating more on specific industries such as renewable energy or healthcare. These VCTs aim to capitalise on positive trends in a particular sector. One notable example is the ‘Dot Com Bubble’ trend of the 1990s, where many technology stocks grew rapidly in just a few years.

Specialist VCTs are suitable for investors with a strong interest or expertise in a certain industry. For example, the Octopus Future Generations VCT focuses on sustainable companies aligned with positive ESG values.

AIM

AIM Venture Capital Trusts invest in companies that are or will soon be listed on the Alternative Investment Market. One example is the Hargreaves Hale AIM VCT which has invested in over 70 companies, of which 60 are on the AIM and the other 10 are unlisted. As of September 2022, the most highly valued company in the portfolio is Zoo Digital Group PLC, valued at just over £6 million.

To be listed on the AIM, companies must satisfy certain criteria, such as annual audits, an initial admission fee, and yearly fees to the London Stock Exchange.

Limited Life

Limited life Venture Capital Trusts are launched to produce returns with a target date in the future. Typically, this is between 5 and 7 years after the launch of the VCT. One example is the ProVen Planned Exit VCT that aimed to realise gains within six years of launch.

Unfortunately, these limited-life VCTs are rare nowadays with most providers offering evergreen VCTs, which are those that are held indefinitely.

Tax Rules

Investing in Venture Capital Trusts comes with several tax benefits, including:

• Income tax relief up to 30% on investment in a VCT of £200,000 or less per tax year. For example, if you were to invest £100,000 in VCTs, you can claim £30,000 from your tax bill. Note that to be eligible, you must hold your position in your VCT for at least 5 years. If you sell before the five-year point, you will need to repay any tax relief.
• Dividends paid out from your VCT investments are not liable for taxation.
• You pay no capital gains tax (CGT) on any profits you generate from selling your VCT shares.

The current VCT tax rules from HMRC have been in place since the 2006/2007 tax year, though they could be subject to change in the future. Thus, any tax-free CGT and income tax relief may change when you realise the gains in 5 years.

Note that Venture Capital Trusts do not entitle investors to business property relief. This differs from other venture capital schemes such as EIS, whereby investments held for more than 2 years are exempt from inheritance tax (IHT).

Pros Of Venture Capital Trusts

• Opportunity to invest in early-stage businesses – VCTs involve investing in small companies that could become successful businesses. For example, the real estate company Zoopla initially received investment through VCTs which facilitated its listing on the London Stock Exchange in 2014.
• Tax benefits – Investing in VCTs allows individuals to claim income tax relief of up to 30% on investments as well as tax-free dividends and capital gains.
• Diversification – Venture Capital Trusts are diversified investments supporting various companies in multiple sectors. Investing in diverse portfolios can help to mitigate risk.
• Passive income – VCTs are controlled by experienced fund managers that make informed decisions on your behalf. Investors can take a more hands-off approach since there is no need to continuously monitor portfolios.

Cons Of Venture Capital Trusts

• Risky investments – VCTs involve investing in smaller companies that have higher chances of insolvency than already established businesses. There is no guarantee that the companies will perform well and if they fail, your portfolio suffers.
• Tax rules can change – Investments in Venture Capital Trusts must be held for at least 5 years. Within this time, tax rules could change, meaning you may not see some of the benefits offered when you first invested.
• High minimum limits – VCTs have a high barrier to entry with initial investment amounts typically in the thousands.
• Long-term investments – If you exit earlier than the 5-year investment holding limit, any tax relief must be repaid.
• High fees – Initial brokerage fees, annual charges and performance costs can make VCTs an expensive investment.

Comparing VCT Brokers

Consider the following when assessing brokers with Venture Capital Trusts:

• Fees – Compare any fees at the broker (a percentage of your investment, typically around 3 to 5%) plus any ongoing charges such as the annual management fee. For example, Interactive Investor charges a one-off £30 fee to process investment applications. There may also be a performance fee depending on certain circumstances. For example, the Octopus Apollo VCT includes a performance fee of 20% which is only incurred if the portfolio’s performance for the year exceeds the previous peak net asset value, plus dividends.
• Investment requirements – The minimum you are allowed to invest will vary between brokers and specific VCTs, however, it is typically several thousand pounds. For instance, the Blackfinch Spring VCT PLC has a minimum initial investment of £3,000, whereas the Calculus VCT PLC minimum is £5,000.
• Investments available – Consider the Venture Capital Trust investments available through a given broker. At the time of writing, Interactive Investor offers 12 generalist VCTs, making them an excellent choice for individuals looking for diverse portfolios. However, if you are searching for specialist VCTs, you will need to look elsewhere.
• Customer Support – Investing in Venture Capital Trusts requires a solid knowledge and understanding of the fee structure and investment risks, which can be explained by the broker’s customer support team or fund manager. FAQ sections and support centres on the brokers’ websites can also be helpful.
• Reviews – Look for any good or bad customer ratings and reviews of the platform to get a better perspective of the services. First-hand experiences from other clients can be valuable but should also be taken with a pinch of salt.

Bottom Line

The tax benefits and exposure to diverse sectors in the UK make Venture Capital Trusts attractive to some investors. Additionally, they are a more passive way to invest, allowing individuals to rely on fund managers to control investments. However, VCTs are risky investments and positive returns are not guaranteed.

For those interested in Venture Capital Trusts, Interactive Investor is our recommendation. The FCA-regulated firm offers multiple VCTs with transparent fees.

FAQ

Article Sources

HMRC Venture Capital Trust Statistics

Interactive Investor VCT listings

Venture Capital Trust Manual