VCTs: three opportunities for investors
Venture Capital Trusts (VCTs) were introduced by the government in 1995 to encourage investment into early stage and new companies in a tax-efficient way. It was believed that raising private capital for smaller companies would help stimulate the economy.
They’re run by a fund manager who invests in small companies, which are either unquoted or listed on the Alternative Investment Market (AIM). As such, VCTs are subject to initial and ongoing fees, including administration fees and an annual management charge.
As you are investing in entrepreneurial start-ups, they are considered riskier and more volatile. They are also less liquid than other investments so could be harder to sell. The big benefit is that investors can allocate up to £200,000 per tax year (minimum tends to be between £3,000 and £5,000) and gain 30% tax-relief. Dividends and growth are also tax-free. See YourMoney.com’s VCT guide for more information.
In 2016/17 VCTs experienced an almost record-breaking year, raising £542m and so far this tax year, £364m has already been raised.
According to analysis from Wealth Club, this is an increase of over 600% on this time last year when it is estimated less than £50m had been raised.
It said speculation about new restrictions on tax-efficient investments have fueled investor interest pre-Budget. Alex Davies, CEO and founder of Wealth Club, adds: “VCTs are attracting investment quickly and filling up in a matter of months as higher-earners, who can no longer invest vast sums in pensions, are seeking out a tax-efficient alternative.”
The VCT opportunities for investors
While VCTs are filling up fast with a number likely to close before the Budget, there are still opportunities for investors. Wealth Club lists the following three:
- Mobeus VCTs
Mobeus has been a dividend-producing machine. Someone who invested £10,000 in 2010/11 in a linked offer across its four VCTs would have received £7,983 in dividends.
The risks are more contained by VCT standards: this VCT invested significantly in Management Buy Outs (MBOs) with great success. Even though new VCT rules no longer permit this type of deal, if you invest today you still get exposure to the existing portfolio of large, profitable, cash-generative businesses as well as new growth investments.
- Maven Income and Growth VCTs 3 & 4
Maven VCTs give investors access to a decent portfolio of existing investments, plus newer ones in younger and more dynamic companies. Since rules became more restrictive in 2015, Maven (which was spun out of Aberdeen Asset Management) has been one of the most active managers. Recent investments include the GP service, an online GP service, Rockar, an innovative car dealership and Chic Lifestyle, a cloud-based inventory management platform for boutique hotels. With ten regional offices, Maven has access to deals many of the more London-centric VCTs might miss.
- Octopus Titan
If any VCT is going to find the next Facebook, Wealth Club believes it will be Octopus Titan. It was an early investor in Zoopla, the first VCT-backed company valued at more than £1bn. Other investments include Graze.com, Secret Escapes and Eve Sleep. It has also had successful sales to the likes of Google, Amazon, Twitter and Microsoft. Last year Magic Pony was sold to Twitter for a reported $150m and SwiftKey to Microsoft for a reported $250m.
Octopus also allows you to invest your ISA into a VCT. This means if you like the VCT you can invest using existing ISA money, i.e. without spending any new money, but still get the income tax relief of up to 30%.