VCT demand looking strong, despite rule changes

Experts say if the the past two tax years are anything to go by, popular VCT offers will fill up quickly.

The early indications are that venture capital trusts (VCTs) are set to have another bumper year of investor activity, despite new rules being ushered in over the past couple of years, which have arguably reduced their attractiveness.

According to the Wealth Club, a tax-efficient investment service that facilitates VCT applications, fundraising in 2018-19 could beat the £745 million raised in 2017-18, which was the second-highest on record.

At time of writing on 9 January, two VCTs had sold out: the Octopus Aim VCT and the Hazel Renewable Energy VCT. By mid-February, the Wealth Club expects a further three to close its doors, from Northern, British Smaller Companies and Hargreave Hale.

Alex Davies, founder of Wealth Club, says that if the past two tax years are anything to go by, popular offers fill up quickly. Wealth Club estimates 22,500 investors put money in VCTs last year – up from 13,281 in 2015-16, the last official figures. “The message is clear. If you want to invest in a VCT this year and spot something you like, don’t hang around,” says Davies.

Davies does not expect fundraising to be hit by recent rule tweaks to VCTs. In a nutshell, VCTs have become riskier propositions as they are now required to invest in earlier-stage companies, mainly those that have been trading for less than seven years. In addition, the investable universe for VCTs has become more limited, with management buyouts excluded and investments in asset-backed firms restricted.

The attractive 30% initial tax relief for investments up to £200,000 a year, though, still remains in place. According to Davies, rule changes are a constant theme of VCTs, but the main driver underpinning demand will continue to be pension changes, such as the pension allowance taper for those earning £150,000 or more. Despite VCTs becoming riskier, he notes that “VCTs are one of the last relatively simple and tax-efficient investments for wealthier investors.”

He adds: “They are also a virtuous circle. In return for the generous tax incentives given to their investors, VCT-backed companies create lots of jobs, which in turn create lots of taxpayers. A survey by the Association of Investment Companies showed that on average after three years of receiving VCT investment, a company had created 60 extra jobs. After five years, this had risen to 102.”

Moreover, Davies notes, although VCTs are required to invest in earlier-stage companies when making a new investment, the rule changes do not apply to existing companies within a portfolio. “Many VCTs still contain established, profitable businesses, which can support returns while these younger businesses grow,” he says.

“The rule changes mean overtime dividends from VCTs could become lumpier. That means there might be a year where there are few exits and no or low dividends. In other years, you may have lots of exits and larger dividends.”

Tim Holmes, managing director of Salisbury House Wealth, the financial adviser, agrees the rule changes will not have a negative impact. He says: “The changes mean there is now greater scrutiny of activity. However, this is no bad thing and ensures a focus on companies with genuine long-term growth aspirations.

“In a post-Brexit economy, VCTs may become even more important in ensuring growth companies get access to the funding they need. VCTs are incredibly popular with high net worth investors, but will only remain so as long as attractive tax breaks are attached.”

Davies named Octopus Titan VCT, Maven Income & Growth VCTs 1 and 5, Proven VCT and Proven Income and Growth VCT as his top VCT picks for the 2018-19 tax year.

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