More on the horizon for VCTs

Though most of the ill-fated mini-Budget has now been reversed and we have a new Chancellor in Number 11, one measure announced by Kwasi Kwarteng should be welcomed. The announcement that venture capital trusts (VCTs) are to continue is good news for investors and for the economy as a whole.

After a record-breaking year in 2021-22 for VCT fundraising, some advisers had feared the Chancellor would take the axe to the scheme. Instead, he committed to extend it beyond the 2025 “sunset clause”, which otherwise would have meant an automatic end to the 30% upfront income tax relief.

To be clear, VCTs are not a perk for the super wealthy. Rather these funds provide valuable long-term financial planning opportunities to an increasingly wide number of savers and investors. And they also secure important funding for growing businesses that might otherwise struggle to raise capital.

On the first of those roles, VCTs have become a vital tool for families running up against the limits of other tax-efficient savings schemes. Once investors exhaust their annual £20,000 individual savings account allowance and their £40,000 private pensions allowance (and this is reduced for higher earners), VCTs are the next port of call. They’re also important to the growing number of people worried about the lifetime limit on pension savings.

Remember, the schemes offer upfront income tax relief of 30%, plus tax-free income and capital gains, as well as an annual investment allowance of £200,000. That gives investors scope to use VCTs either to generate tax-efficient income – still crucial despite climbing interest rates – or to build up funds for the long term.

These generous tax incentives are in place because VCT investments are by no means a sure thing. The funds are only allowed to invest in companies that meet strict qualifying criteria – broadly speaking, they must be small, early-stage ventures – and these enterprises are, by their very nature, more risky. There’s a real chance of some VCT investments going completely bust.

The tax breaks, then, give investors a cushion – and therefore encourage investment in businesses that they would otherwise regard as too risky. And that ensures a flow of cash into companies with the potential to grow over the long term – and to deliver a bunch of broader benefits.

The impact of that should not be understated. Research just published by the AIC reveals that VCTs have backed more than 500 companies in the past four years alone, investing £1.7bn.

Collectively, those companies employ more than 14,000 staff and are spread across the country. These are innovative and creative endeavours – four-fifths of them invest in research and development, for example, with an average spend of £2.4m.

Indeed, when the Chancellor talks about growth, these are the companies most likely to deliver it. Not all will succeed, of course, but the potential for these businesses to expand, with the right financing and professional support, is enormous. They can be the engine of the UK’s future economy.

For all these reasons, the decision to stick with VCTs was the right one. And this year’s crop of funds has already begun to raise money. Wealth Club, the intermediary, currently lists more than 20 VCTs that are open to investment for the 2022-23 tax year.

More will undoubtedly follow, even though the market backdrop feels less favourable today than during last year’s record-breaking season. VCTs, after all, are a long-term prospect – hopefully paying off over time for both investors and the country.