Adding Venture Capital investments to your investment portfolio is becoming much more about achieving growth rather than just purely for tax relief, according to recent research (Hardman & Co).
In 2022 the demand for VCTs had been particularly strong already. Drivers include restrictions on the amount the more wealthy investors can hold in a pension, as well as rising taxes on dividends and buy to let, making VCTs one of the best tax-efficient investment options left.
The ability for investors to back new and exciting businesses is also appealing for investors and demonstrated by recent high profile successes such as the online used car seller, Cazoo, fashion marketplace, Depop and recipe box seller, Gousto.
The tax reliefs on Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are generous as they invest in smaller unquoted companies, which are higher risk compared to investing in larger, more established, listed companies. However, investors should expect some to succeed and others to fall by the wayside.
You can claim up to 30% income tax relief on a VCT investment, provided you hold your investment for five years so for a £10,000 investment you could claim £3,000 off your income tax bill.
What type of Venture Capital Trusts are there?
Broadly there are two different types of Venture Capital Trust (VCT): generalist and AIM.
Generalist VCTs are the most common form and invest in a wide range of small, usually private companies (those not listed on the stock market) in a range of sectors. They focus on diversification across many early stage companies, which they will often then try to actively work with to help them grow and succeed.
AIM* VCTs invest in new shares issued by Aim-listed companies, and target tax-free growth as well as income. While they are investing in stock market listed forms, the price of these trusts can be more volatile because the companies are valued daily rather than periodically as with unlisted firms.
However, there is more flexibility for them to enter or exit investments, because ordinary shares are more easily sold on the market.
There are also specialist VCTs which focus on just one sector, and more rarely a hybrid trust which invests in both generalist and AIM companies.
Investing in early stage companies offers high potential returns
Should the companies you invest in do well and succeed, you will benefit from any growth achieved. Conversely, these investments involve a high degree of risk.
You would need to have a higher than 10% allocation to Venture Capital, which is the minimum to see a positive effect according to the Research (Hardman & Co).
VCTs and EISs are illiquid investments meaning they cannot readily by sold for cash and are subject to any changes in tax legislation. This means they are suitable only for those experienced, sophisticated or high net worth investors, who accept that they may get back significantly less than their original investment. The value of any tax relief depends on individual circumstances.
If you have any questions see our VCT page. For advice on adding these high-risk assets to your portfolio talk to a Bulbfin financial services expert today.
*AIM – The Alternative Investment Market (AIM) is a specialized unit of the London Stock Exchange (LSE) catering to smaller, more risky companies.