Why no news is good news on VCTs
Venture capital trusts look safe from the Chancellor, writes David Prosser.
Amid all the Budget speculation about changes to the rules on individual savings accounts (ISAs) and private pensions, venture capture trusts (VCTs) appear to be flying under the radar. Last year, just a few months after Labour’s election victory, the Treasury committed to extending the VCT regime. And despite all the kite flying over savings and investment reforms, this is one area where the Chancellor doesn’t appear to plotting changes.
That might disappoint some. The AIC, for example, has called on the government to adjust the VCT rules to allow funds to make more sizeable investments in portfolio companies, and to back slightly larger businesses, recognising that inflation has eroded the real size of the existing limits. In the round, however, no news is good news for advisers and their clients when it comes to VCTs.
VCTs’ tax-free income looks even more valuable now that the UK seems to be moving back into an environment of falling interest rates.
David Prosser
In the meantime, this year’s fundraising round is gathering pace. This month has already seen Albion become the latest VCT manager to seek new money, with investors invited to subscribe for up to £90m of new shares in the three funds it runs. The issue is proving popular, with investors committing £11m on its first day.
For advisers, VCTs continue to offer all sorts of useful financial planning opportunities for their clients. The tax incentives include upfront income tax relief of 30% on investments in VCTs of up to £200,000 a year; that’s a generous slug for clients who have already used their ISA and pension allowances, as well as for those looking to diversify beyond traditional portfolios of equities.
Then there’s the possibility of using VCTs to generate tax-free income, which looks even more valuable now that the UK seems to be moving back into an environment of falling interest rates. The latest decision from the Bank of England’s Monetary Policy Committee – narrowly agreeing to hold rates for now – appears to presage several rate cuts to come in 2026.
In which case, the fact VCT managers can structure funds so that the proceeds from successful portfolio disposals are distributed as dividends could be even more attractive. For years, many VCTs have consistently delivered a generous stream of tax-free income.
Alternatively, there’s the possibility of reinvesting those dividends – potentially even in new VCT shares with upfront income tax relief attached – and focusing instead on long-term capital gains. These are tax-free too.
Indeed, the only major area of tax where VCTs don’t give advisers additional options is inheritance. VCT assets will count towards the value of clients’ estates for the purposes of inheritance tax calculations. Still, there are other possibilities for mitigation in related areas of investment – notably the enterprise investment scheme, which also encourages investment in very small and early-stage businesses.
Given all these opportunities – and assuming VCTs really do escape the Budget axe – it’s likely that the funds will once again prove to be very popular in the 2025-26 tax year. Indeed, there’s a strong argument for not waiting too long to pick your chosen funds – the pace of investment in the Albion issue demonstrates the depth of demand for VCTs already this year. British Smaller Companies is another popular option, raising £25m in its first week.
All the usual caveats apply. VCTs invest in the kind of businesses that can – and do – fail spectacularly. The secondary market for shares is not especially liquid. This is a long-term investment only suitable for investors with larger portfolios – and it’s important to choose carefully.
Those warnings aside, the good news is there’s plenty of choice. The investment platform Wealth Club lists more than 15 VCTs currently raising money and says another four are about to announced new issues. Equally, however, it flags six VCTs that have already shut up shop for this tax year. Don’t leave it too late.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
