What you need to know about your last opportunity to invest in VCTs

Although investors have already invested millions more in Venture Capital Trusts (VCTs) this tax year, there is not much time left to benefit from the substantial tax benefits that these funds offer

Venture Capital Trusts (VCTs) have received investments totaling about 568 million this tax year, which is a 43% increase from the previous year (545 million) and a 16 percent increase over 2023 - 2024 (491 million).

Approximately 20 VCTs are currently accepting investments, and more savers are anticipated to join before significant changes take place.

However, after April, when one of the primary incentives to invest will be reduced, experts are forecasting a mass exodus.

One kind of fund that makes investments in small, frequently startup businesses that aren't yet listed on the main stock exchange is called a VCT. Businesses must meet specific requirements, such as employing fewer than 250 people and having gross assets under £15 million, in order to be eligible for VCT investment.

Due to the possibility of generating larger returns by supporting start-up companies, which frequently expand far more quickly than their larger counterparts, some investors think VCTs are worthwhile.

However, these investments are riskier and have a higher chance of failing than other well-liked funds for do-it-yourself investors. However, the government currently provides substantial tax breaks to make up for that. Investors may invest up to £200,000 annually in VCTs and receive tax relief of 30%, as well as tax-free dividends and capital gains, if they hold the shares for five years.

But starting on April 6, the relief will be cut to 20% as part of a significant overhaul that was revealed in the November Autumn Budget. Check out our BFIA Talks podcast, which you can also listen to on YouTube, for our discussion on how the Budget will harm you.

We examine whether VCTS is still worthwhile and the reasons why you might need to take advantage of it right away.

Is it wise to invest in VCTs?

Approximately 84 percent of 512 VCT investors surveyed by Wealth Club stated that they would either reduce their investment or cease altogether once the relief was removed.

The Association of Investment Companies' (AIC) communications director, Annabel Brodie-Smith, stated: "It's challenging to reconcile the government's pro-growth agenda with the decision to reduce VCT tax relief. Eliminating it will have an effect on businesses, who will find it difficult to obtain funding elsewhere, and it is a crucial incentive for investors to risk their money.

This is not new, as VCTs have been altered numerous times in the past. The wealth manager Evelyn Partners claims that only £50 million was invested in 200304, when the last VCT tax relief was 20%.

When the relief was doubled the following year, the amount invested increased tenfold to 505 million, and rose to 779 million a year later. Investment fell to 267 million in 200607 when the relief was reduced to 30 percent. Investment levels had rebounded to 895 million by the previous year, but they may be on the verge of falling.

The demand for VCTs has historically been driven primarily by tax relief due to their inconsistent performance, according to Jason Hollands, managing director at Evelyn Partners. Many investors will come to the conclusion that 20% relief is not enough to persuade them to support vehicles that make investments in high-risk and illiquid companies. A "

Other changes are more constructive. With VCT investment, businesses will be able to raise twice as much in a single round (10 million versus 20 million for knowledge-intensive businesses) and twice as much over the course of their "lifetime" (24 million versus 40 million for KICs).

It implies that companies can raise more money when they're ready to grow and draw in more investment early on. VCT managers could increase returns and lower investor risk if they invested more in well-established businesses.

"It means we can be a more valuable partner to the most attractive scale-ups and support our winners for longer, so investors get exposed to a more mature, better diversified portfolio over time," says Rupert West, manager of the Puma VCT 13.

Aveni, which offers artificial intelligence (AI) solutions to financial services companies, Lucky Saint, a non-alcoholic beer company, and the snack brand Love Corn are some of Pumas's most profitable VCT investments.

However, Andrew Wolfson, CEO of Pembroke Investment Managers, cautions that there might be a drawback. Early-stage companies may suffer if VCTs raise less capital and managers increase their investments in their current holdings. "As fewer funds are raised, fewer new investments are made, so less capital reaches the early-stage companies that VCTs were designed to support," he claims.

Pembroke VCT has successfully left roles at the fashion company Me and Em and the food company Pasta Evangelists. Recent new investments include the payments platform Ryft and customer experience software provider Serve First.

What are the substitutes for VCTs?

For investors who prefer greater tax efficiency over a VCT, there are other options. One place to look is obviously Enterprise Investment Schemes (EIS).

EIS directly funds start-up companies. Unlike a VCT, which may invest in up to 100 companies, investors may choose to invest in a select few companies themselves or through managed funds. In either case, this is a high-risk investment that is typically reserved for seasoned, wealthy investors.

According to Davies, "EIS has always offered exceptional tax advantages. Although the tax relief is returned quickly, returns may not be received for a long time, if at all, and they are much less liquid than VCTs.

As long as they hold the shares for three years, investors can invest up to £1 million annually in EIS and receive a 30% tax break. Additionally, the amount that can be invested in EIS companies will double to £10 million starting in April. This might lead managers to begin focusing on larger companies, which could lower risk and increase profits.

Even bigger tax breaks of up to 50% are available through Seed Enterprise Investment Schemes (SEIS), but they only invest in the smallest start-ups; these businesses must be under three years old, employ fewer than twenty-five people, and have gross assets under £350,000.

Hollands is skeptical that many people can benefit from either SEIS or EIS. For VCT investors looking for a tax-efficient alternative, he cautions that they are not a straight swap.

However, VCTs are still in use. According to Davies, "the fundamental investment case for VCTs still stands; if you want to back fast-growing UK companies, you need to look at them." Investors with a risk appetite should still consider them because of the potential for rapid growth and the opportunity to own a piece of the Next Big Thing.

According to data provider Trustnet, he favors the Octopus Apollo VCT, which has increased 54.8% over the last five years. Davies claims, "It is fairly boring and primarily invests in B2B software companies that are generally later stage." Among its investments are human resources technology provider Sova and smart thermostat manufacturer Switchee.

With a five-year return of fifty percent and a bias toward software and healthcare firms, Hollands favors the Albion Enterprise VCT. Its largest holdings include weight loss medication firm Oviva and Runa Networks, which provides technology for digital gift cards.

Tax relief is not the only reason to invest in this dynamic sector of the market; rather, think of it as the icing on the cake. VCT investment may suffer from April as savers adjust to the changes. Additionally, considering previous tinkering, there is always a chance that the tax relief will be increased in the future.