VCTs raise more than £30m in one week as investors rush to tax-efficient investments

As is usual at tax year-end, investors are rushing to venture capital trusts to invest in some of the UK’s best up-and-coming businesses.

The total amount raised by VCTs this tax year so far stands at £360million, a 1.2 per cent increase compared to this point last year, and that’s despite the backdrop of Covid-19.

According to Wealth Club, a tax-efficient investing options platform, last week saw the highest inflow into VCTs of the tax year so far, with £33.5million raised. For comparison, the equivalent week in 2020 saw only £19million raised. 

There is still time to invest in some VCTs but many are quickly selling out – so be quick!

Alex Davies, chief executive of Wealth Club, said: ‘VCT demand has been buoyant this tax year and with less than two months to the end of it, sales should beat those in 2019/2020 overall.

‘Demand has been driven by a few factors. Firstly, the investment case is much better than it ever was. 

‘Thanks to rule changes a few years ago, VCTs are now packed full of fast-growing tech-enabled businesses, the type that have seen their fortunes prosper rather than diminish as a result of the pandemic. 

‘Secondly, for wealthier investors there are now fewer ways to build up a decent retirement pot. Pensions are out of the window for many, investing in buy-to-let has become less tax efficient, and taxes on dividends are also higher. VCTs are an obvious next choice.’

There is also speculation that taxes will increase in the March Budget and so investors with extra cash are rushing into legitimate tax efficient options while they can. 

While some VCTs have already sold out, including the Octopus AIM and Amati AIM vehicles, there are still plenty available. But capacities are filling up quick so if you’re considering investing, you need to act quick. Here’s everything you need to know.

What is a venture capital trust?

A VCT is a listed company whose shares trade on the London stock market, like an investment trust. Also like an investment trust or fund, a VCT invests in companies, though they are typically very small or start-ups that are looking for investment to help them grow. 

There are very strict rules on how VCTs can invest: for example, they can only hold companies that have objectives to grow and develop. There should also be a significant risk of loss of capital, after allowing for tax relief, to prevent an emphasis on capital preservation.

VCTs are a good option for investors who would like to get tax relief by investing in higher risk funds but who also understand they might get back less than they invested and are comfortable with that risk.

Alex Davies is chief executive of Wealth Club

This means they are usually better suited to higher net worth individuals or those with a bit of extra cash rather than those hoping for steady and stable returns. 

They are also a good option for investors interested in small firms that are not listed on the stock market. While there is high risk, there is also the potential for really great returns if the company goes on to be a success.  

How does the tax relief work?

The government offers VCT investors generous tax relief. Investors can receive up to 30 per cent income tax relief on the initial investment. This could be as much as £60,000 income tax relief on the full VCT allowance of £200,000. 

Furthermore, any dividends and capital gains (though these are not guaranteed) are tax free. Investors can sell their stake in a VCT after the five-year minimum holding period, reinvest the proceeds in another VCT and receive a further 30 per cent income tax relief.

Davies said: ‘With a more punitive taxation environment on the horizon for wealthy investors, VCTs stand out as one of the last bastions of tax efficiency. 

‘And if things go right, it supercharges those returns. For example, if you had invested in the Unicorn AIM VCT, the best performing VCT over the past 10 years, your return excluding tax relief would be 2.75 times your money assuming you reinvested the dividends.

‘If you include the initial tax relief on the investments and the tax relief on dividend reinvestment your effective return would be 5.38 times.’  

VCT managers often announce their open offers from September onwards when investors are most likely to be considering their tax positions, but if they have not sold out, will usually stay open until the end of the tax year.

While there is no ‘right’ time to invest in a VCT, some investors will leave it till the end of the tax year when they know what ‘extra’ cash they might have. However, they may also find that the VCTs they wanted to buy are no longer open. 

Davies said this is expected to be even more of problem than usual this year as some of the bigger names such as Mobeus and Northern are not raising, while the largest VCT, Octopus Titan is looking to raise up to £120million (including over-allotment), which is down from £170million last tax year.

Here are the VCTs listed on Wealth Club, most of which are still available but investors must be quick. 

Which VCT should you invest in? 

While the choice isn’t as vast as general investment funds or trusts, there are still plenty of VCTs to choose from.

The three most popular funds so far this tax year have been Octopus Titan (raising £81million), Baronsmead (£52.3million) and Albion (£42.5million). 

All three are very well known VCT names that have been around for a long time. They all have a diverse range of holdings, and a good mix of younger and more established businesses and good long-term performance.

Also like general funds and trusts, VCTs will have differing strategies. For example, the £117million Pembroke VCT has a founder led one, and only invests in companies run by ‘exceptional founders’.

Andrew Wolfson is chief executive of Pembroke VCT, which invests in companies focused on education, wellness, food and beverage, digital services and design and media

Chief executive Andrew Wolfson said the team applies a ‘stepping stone’ principle where investment continues at various stages of its growth. 

He said: ‘We encourage founders to focus on the next 12-18 months rather than try and forecast five years out. There are no restrictions on how long a VCT can hold shares in an underlying portfolio company.’

Pembroke’s focus includes education, wellness, food and beverage, digital services, design and media and currently has access to a maturing portfolio of 37 growth stage companies. 

What types of smaller companies will you be helping?

The exciting thing about investing via a venture capital trust is the range of businesses you could be a part of, and potentially make a real difference in.

Some of the small businesses that This is Money has profiled received funding via VCT money including Elvie, which landed the largest femtech investment in 2019 after closing a £33.2million series B funding round, led by private equity firm IPGL and supported by Octopus Ventures and Impact Ventures.

The Seneca Capital Growth VCT has achieved exceptional results with some of its past holdings including Gear4Music, which it invested in in June 2015 and exited in 2018 at a 7.4 times return (net of tax reliefs) for investors.  

In terms of current holdings, the Seneca team is especially excited about Silkfred and Skinbiotherapeutics. 

Seneca’s John Davies is excited about current holdings Silkfred and SkinBio Therapeutics

Silkfred is an online marketplace for independent ladies’ fashion brands, founded in 2011. It now works with over 900 brands and sells to more than one million customers.  

Investment director, John Davies, said: ‘Silkfred has shown impressive growth throughout its existence and as a result of its operating model, the business itself takes minimal inventory/working capital risk on new brands, lines or products.

This aspect of the business model has proved invaluable during the Covid pandemic and enforced lockdown in the UK and it is arguably better placed than ever before.’

SkinBioTherapeutics is a life science company focused on skin health. The company’s proprietary platform technology, SkinBiotix® applies research discoveries made on the activities of lysates derived from probiotic bacteria when applied to the skin. 

Davies added: ‘The company has shown that the platform can improve the barrier effect of skin models, protect skin models from infection and repair skin models while proof of principle studies have shown it has beneficial attributes applicable to each of these areas. 

‘It is delivering on all fronts as it seeks to commercialise the numerous opportunities across its asset base. This progress and optimism has been reflected in Skinbio’s share price, that’s currently trading at over two times our entry value.’

What is the future of VCTs? 

With the Budget less than a month away, after one of the most challenging years in British history alongside rumours of an increase in taxes, many will be waiting with bated breath for what Chancellor Rishi Sunak has to say.

Seneca’s Davies said: ‘Much will depend on the March Budget and how the Chancellor elects to deal with the repayment of financial support measures provided through the pandemic. 

‘With private sector capital most likely to be the key to recovery it appears unlikely that there will be any adverse changes to VCT rules. If general tax rates do change then arguably VCTs become even more attractive. 

‘The real wish list is that the Chancellor widens the scope of VCTs to include more businesses who have a genuine need for growth capital. But as long-time providers of capital to growing businesses, VCT’s have a huge part to play going forward.’

While the pandemic has sadly seen the permanent closure of many businesses, it has also seen the creation of many others, as budding entrepreneurs are coming up with ideas to adhere to a new way of living.

This is Money has showcased a raft of new brands born in the past year from a platform selling DIY meal kits to a gift box especially for furloughed workers and a wine bottle designed for socially distanced drinking in the park. 

This shows the economy is continuing to fight through the difficulties and the UK remains and powerhouse of entrepreneurship. 

Wolfson said: ‘The Government recognises that small businesses are the lifeblood of the economy, and VCT and EIS managers are key to creating and nurturing this start-up culture. 

‘Businesses which have strong leadership can navigate through the crisis. Entrepreneurs tend to be problem-solvers with high levels of resilience and a positive attitude.’  

This post first appeared on Dailymail.co.uk