A year to venture out early
David Prosser on the current appeal of venture capital trusts.
Venture capital trusts (VCTs) are traditionally an end-of-tax year investment. Advisers seeking to generate income and capital gains for clients while maximising tax efficiency have tended to wait until the end of the tax year to take full advantage of the £200,000 annual VCT allowance. VCT managers have often launched new funds or share issues to reflect this pattern of demand. In 2025-26 however, there may be a case for going early.
For one thing, a number of interesting VCTs run by well-respected managers have already begun raising money for this tax year. Around ten funds are currently open to investment, with a couple more waiting in the wings. In many cases, these funds offer discounted charges and other freebies to “early-bird” investors; the deadline to qualify for some of these perks is as early as 31 July at several funds.
Participating in new share issues from existing vehicles may be a way to access an attractive income stream.
David Prosser
The macro background also offers up reasons for making an early VCT investment this year. With interest rates falling, advisers focused on clients’ income needs will be positioning for yield. VCT managers aim to deliver generous incomes by structuring portfolios to produce regular pay-outs; it takes a while for new funds to get to that point, but participating in new share issues from existing vehicles may be a way to access an attractive income stream.
The other intriguing question is what might happen with the VCT rules. There has been much speculation in recent weeks that Rachel Reeves, the Chancellor, is about to take the axe to the annual cash ISA allowance, but the news on VCTs looks more encouraging. The Government last year committed to maintaining VCTs until at least 2035 and there is a growing push to persuade the Treasury to be a little more generous.
In particular, venture capital groups point out that the current £200,000 annual investment limit dates from 2003, so an increase is well overdue. They would also like to see the threshold for qualifying portfolio investments extended so that VCT managers can put money into businesses that are more than seven years old, the current limit. Another mooted change is a more liberal interpretation of what constitutes a “knowledge-intensive company”, where VCTs are allowed to invest more freely.
None of these changes would come with any significant cost to the Treasury. And as measures that would encourage additional capital raising by early-stage companies, they would also be a good fit for the government’s objective to encourage more investment in young British businesses.
Naturally, improvements to the VCT regime would also give the whole sector a boost – to the advantage of advisers and clients with existing holdings in funds. It seems unlikely that changes announced in this autumn’s Budget would come into effect before next April, but a rising tide floats all boats.
All of which provides food for thought. Since the last Budget, when the Chancellor announced that most private pension savings will fall within the inheritance tax net from April 2027 onwards, VCTs have attracted a little less attention. The funds aren’t exempt from inheritance tax, so advisers have been focusing on similar types of investment that could provide an estate planning opportunity, such as the enterprise investment scheme (EIS). However, the 2024-25 tax year was still a bumper one for VCT fund raising – and it may make sense to beat the rush in 2025-26.
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.
