Majority of investors in VCTs use them to save for retirement
VCT investors typically have 13% of assets invested in these tax-efficient vehicles.
Most investors in venture capital trusts (60%) are using them as a way to save for their retirement, according to a survey from the Association of Investment Companies (AIC).
The typical VCT investor has 13% of their portfolio invested in these vehicles, which invest in small, young UK companies with high growth potential.
VCT investors have a range of different attitudes to risk. Almost half (48%) of respondents to the survey consider themselves as medium-high risk investors and a further 14% say they are high-risk investors. However, 28% of VCT investors classify themselves as medium-risk and 10% cautious.
Why do investors choose VCTs?
VCTs offer attractive tax incentives, including 30% upfront income tax relief, tax-free dividends and tax-exempt capital gains. These tax breaks are important to VCT investors, with 79% saying they are the primary reason they invest in the vehicles.
However, the same percentage of respondents (79%) say the growth potential that comes from backing young companies early is another reason they invest. More than half (55%) of VCT investors cite supporting innovation as a factor and the same number (55%) invest in VCTs to support UK entrepreneurs (see chart on next page).
There is general agreement that the current economic outlook in the UK and the possibility of a recession makes supporting smaller UK businesses more important, with more than three-quarters (76%) of respondents agreeing2.
VCTs invested £650 million in small UK businesses in the 2022 calendar year, a 21% increase on the previous year, when they invested £539 million.
Source: AIC/Research in Finance
When asked to rank how important the different tax benefits of VCTs are to them, 55% of respondents choose the 30% upfront tax relief as the most important. The next most popular benefit is tax-free dividends, with 28% of respondents rating these as most significant.
Tax-free dividends: spend or reinvest?
Most VCT investors surveyed reinvest their tax-free dividends, with 35% reinvesting them in other types of investment and a further 28% ploughing them back into VCTs. However, 29% say they spend their tax-free dividends3. While some respondents spend them on luxuries and hobbies, such as “golf subscriptions and gear”, “fun restaurants” and “holidays”, others rely on them for living expenses, with one respondent saying they used the dividends for “fuel bills” and another for “normal day-to-day expenditure”. Several respondents said that the tax-free dividends supplement their retirement income.
The various tax incentives are essential to investors’ support of the VCT scheme. Only 8% of respondents would still invest in VCTs if the upfront tax relief was removed and only 16% would still invest if the advantage of tax-free dividends was removed4.
In a free-text question with no prompted responses, VCT investors were asked to compare the benefits of VCTs to other tax-efficient schemes, such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and business property relief. Of those who offered a response, 24 said that VCTs were easier to invest in or more accessible; 19 cited the tax-free dividends as a comparative benefit; and 16 reckoned that VCTs were less risky than other tax-efficient schemes, though some of these respondents emphasised that VCTs were still risky compared to other, more mainstream investments.
- ENDS -
Follow us on Twitter @AICPRESS
Notes to editors
- The online survey of 107 investors in VCTs was commissioned by the AIC and conducted by Research in Finance between 23 January 2023 and 3 February 2023. To participate, respondents had to hold VCTs and be self-directed to some extent: i.e. those who invest in VCTs solely through a financial adviser and defer decisions to the adviser entirely were excluded from the sample.
- Respondents were asked: “To what extent do you agree or disagree with the statement: The current economic situation in the UK and the potential upcoming recession makes supporting smaller UK businesses more important?” 29% strongly agreed, 47% somewhat agreed, 19% neither agreed nor disagreed, 6% somewhat disagreed and 0% strongly disagreed.
- Respondents were asked: “What do you do MOST with the tax-free dividends you receive?” 35% said that they reinvested them in other types of investment, 29% said they spent them, 28% said they reinvested them in VCTs, 5% said they did not receive dividends from their VCT investments and 4% used the dividends in some other way.
- When asked, “Would you still invest in VCTs if the upfront 30% income tax relief was removed?”, 8% said “yes”, 66% said “no” and 25% were unsure. When asked, “Would you still invest in VCTs if the tax relief on dividends was removed?”, 16% said “yes”, 55% said “no” and 29% were unsure.
- The Association of Investment Companies (AIC) represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for investment companies to be understood and considered by every investor. The AIC has 349 members and the industry has total assets of approximately £268 billion.
- For more information about the AIC and investment companies, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
- To stop receiving AIC press releases, please contact the communications team.
