Don’t miss out on VCTs

Buy now while stocks last is a dreadful message to be giving anyone who is charged with making sensible financial planning decisions. But when it comes to venture capital trusts, there really is a danger of missing out this tax year – the funds, which have limited capacity, have been selling like hot cakes.

The thing about VCTs is that while they offer a generous range of tax reliefs – in return for investors putting their money into small, early-stage businesses – the most eyecatching of these perks is only available on new VCT shares. To get 30% upfront income tax relief, investors must buy shares in a newly launched VCT, or new shares issued by an established fund.

Each tax year therefore, sees a spate of new VCT issues – but 2021-22 has been unusually busy. The investment platform Wealth Club estimates VCTs had raised £710m by the end of January, ahead of the £685m that investors committed over the whole of 2020-21. There’s a good chance that VCT fundraising will break the all-time record by the time the tax year ends on 5 April – and bear in mind that in 2005-06, when the industry raised £779m, VCT tax reliefs were more generous.

The most popular funds do not remain on the shelf for long. Last month, when Gresham House opened new share issues at the three Mobeus VCTs it advises, capacity was reached within 22 hours. Advisers and investors who didn’t subscribe on day one missed out.

Several factors are driving VCTs’ popularity. One is that it is becoming harder to take advantage of other tax-efficient investments – particularly private pensions, where high earners are now falling foul of both the annual allowance and the lifetime allowance. Another factor is that VCT managers offer decent yields, structuring their funds to pay attractive dividends; that’s enticing in this ongoing period of super-low interest rates.

The growing maturity of the VCT sector also helps. VCTs were first introduced by John Major’s Conservative government more than 25 years ago – there is now a long track record of performance for advisers to study, covering different stages of the economic cycle. The leading managers in the VCT field are experienced and well-established – their value proposition is clear.

Those managers tend not to talk in terms of tax breaks. They are keen to make the case for VCTs as an investment worth considering in their own right. VCT-backed companies have the potential to deliver stellar returns as they scale up at speed, managers say. They point to success stories such as the online estate agent Zoopla and Depop, the super-trendy second-hand clothing platform, which grew with financial backing from VCTs.

All of which is true – but we hear less, of course, about VCT investee businesses that don’t make the grade; the nature of investing in these immature ventures is that there will be losers as well as winners – and by losers, we mean complete blow-ups. Investors have to be prepared for that risk; if VCTs were a sure thing, there would be no need to offer such generous tax incentives to encourage people to part with their cash.

Still, for investors with the right profile and an appetite for taking risk in search of return, VCTs do have much to offer. The question this year is whether those investors are going to be able to get into the funds they want.

A word of warning on that, by the way. With so much money raised, VCTs will have to work hard to find enough investment opportunities to back without lowering their standards. That is something to watch.