The growing demand for VCTs

Stuart Lewis, Business Line Manager for VCTs, Octopus Investments

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Venture capital trusts (VCTs) were set up by the government more than two decades ago to encourage investment into UK smaller companies and entrepreneurs most in need of finance to help them grow. The ability for retail investors to gain access to these exciting companies in a tax- efficient way has proved popular, with VCTs raising nearly £430 million of new VCT investment in the 2014/15 tax year¹.

Ongoing changes to pensions could play a part in increasing demand. The continued reductions to the annual and lifetime allowances – coupled with the threat of a new flat-rate of upfront pensions tax relief – will likely encourage more high earners to look at alternative options for long-term wealth accumulation in a tax-efficient way.

In the current ever-changing legislative and regulatory landscape, many investors may also be nervous about locking up all of their money in a pension for 20 or 30 years. For some, being able to complement their investment portfolio through accessing some money from a VCT investment after only five years, may offer useful flexibility – although VCTs themselves are of course also subject to legislative changes which can affect the tax reliefs available.

We also believe demand for VCTs is increasing as a result of the government’s recent efforts to address tax avoidance. This has potentially resulted in increasing investor awareness of long-standing government designed schemes which offer tax reliefs, such as VCTs, and that also support policy objectives, create jobs and make a significant contribution to the UK economy. We believe this is one of the underlying drivers behind the 74% increase in large VCT investments – those over £50,000 – that Octopus received in 2015 compared to 2013².

Compelling opportunities

Since investing in smaller companies is inherently high risk, the government has put in place attractive tax incentives to encourage investment into these dynamic businesses. For VCTs, these include up to 30% upfront income tax relief, providing shares in the VCT are held for at least five years, as well as tax-free dividends and tax-free growth.

Of course, it’s not just the tax benefits that make VCTs so attractive to investors. For many, it’s the opportunity to share in the growth potential of fast growing, exciting young companies.

Take SwiftKey, the company behind the app for faster, easier typing on mobile phones and tablets that is now being used on more than 300 million devices worldwide³. It was widely publicised that SwiftKey was recently acquired by Microsoft, but less well known is the fact that the company was backed by VCT funding from an early stage, providing retail investors with the opportunity to share in its success.

SwiftKey is a great example of the UK’s ability to create global, world-beating companies. What’s more, there’s the potential for many more UK success stories like SwiftKey across the VCT industry. At Octopus our VCTs have backed several successful businesses from an early stage, including property group Zoopla and UK travel company Secret Escapes.

Provided investors are comfortable with the higher risks associated with investing in smaller companies, VCTs could be an attractive addition to their investment portfolio. It’s a point that seems to be echoed by many financial advisors with recent research from Intelligent Partnership showing that 91% of advisers are expecting to do more business in VCTs in 2016⁴.

¹Association of Investment Companies, 2015
²Octopus Investments, 2016
³SwiftKey, 2016
⁴Intelligent Partnership, 2016