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Venture capital trust investors are turning back towards the tax-efficient, high-risk asset class in a race to buy before the end of the tax year.
According to data from Wealth Club, an investment service, inflows to VCTs hit £144.5mn in the four weeks to March 25, an 18.8 per cent increase on the same period last year, as investors with spare cash attempted to put their money to work before the end of the tax year on April 5.
However, overall flows for the tax year are down 19.8 per cent to £730mn, in what has been a slow year for the industry. The end of easy money, due to low interest rates and the threat of recession, has caused funding for technology start-ups, in which VCTs predominantly invest, to plunge across Europe.
“Everything has been pretty dismal over the past year with news about the economy, the thrashing of technology valuations and higher interest rates,” said Wealth Club chief executive Alex Davies. “But, ultimately, VCTs are highly tax efficient — people held off until the last minute and now they’re coming back with a vengeance.”
VCTs offer investors up to 30 per cent income tax relief on investments up to £200,000 per year, and tax-exempted dividends.
When shares are sold the profits are exempted from capital gains tax, but relief for capital losses against income are not offered. VCTs are listed on the London Stock Exchange and can be sold back to the market or to the fund manager, but the investments must be held for five years for the investor to benefit.
While describing VCT investments as being on the “racier end of the scale”, Craig Rickman, personal finance editor at platform Interactive Investor, said that upcoming changes to the way investments are taxed may be prompting fresh interest in them.
“The capital gains tax and dividends tax allowances are both halving from April and VCTs typically shield investors from both these taxes.”
Some prominent VCTs are close to capacity, while others are struggling to complete their investment round. Baronsmead and Pembroke are 93 and 71 per cent filled respectively, while ProVen and Molten Ventures have 64 and 45 per cent remaining.
Of the 35 offers this year, nine — including Albion, Octopus Aim and Apollo and British Smaller Companies — have closed before the pre-tax deadline, compared with eight out of 28 the previous year.
Performance was mixed in 2023, with average generalist performance for the 10 largest managers — which focus on a wide range of companies in different sectors and stages of development — down 0.1 per cent and Aim VCTs — which invest in companies listed on the Aim sub-market — down 13.7 per cent.
However, over the past five years, the performance of average generalist VCTs has been 28.11 per cent, with average Aim VCTs losing 1.46 per cent in the same time period.
According to Rickman, investing in VCTs is not without risk since “performance can be volatile, fees tend to be quite high, and they’re typically less liquid than [investments held in] more traditional tax wrappers, such as Isas,” he said.
“You should typically avoid choosing investments purely for tax-saving reasons. There’s little merit in trimming your tax bill if you end up with a product that’s unsuitable for what you want to achieve,” he said.
