In November 1994, Ken Clarke, the then-Chancellor, stood up in the House of Commons to deliver his Budget.
Included in it was a scheme designed to give individual investors access to unlisted private companies with growth potential.
Thirty years later, the venture capital trust scheme has raised more than £12billion for British start-ups.
In the last tax year, the VCT scheme raised £882million, its third-biggest year of fundraising, behind £1.13billion in 2021/22 and £1.08billion in 2022/2023. Since 2018 VCTs have invested some £2.9billion in almost 800 businesses.
In comparison, VCTs raised just £160million in their first tax year, 1995-96.
Lucky break: Non-alcoholic beer brand Lucky Saint secured VCT funding from ProVen VCTs
Richard Stone, chief executive of the Association of Investment Companies, says: ‘VCTs are a British success story and they have helped create several household name companies, generating thousands of jobs and boosting economic growth.
‘VCTs have made major contributions across industries, from tech to healthcare, retail to manufacturing.’
For investors, VCTs offer the opportunity to invest in innovative British firms they wouldn’t ordinarily be able to access – as well as tax breaks which could be useful to those who have maxed out vehicles such as Isas and Sipps.
However, the high level of risk involved means they are not for everyone. VCTs are designed to be long-term investments, and backing start-ups means investors need to be prepared for the possibility they will lose all their cash.
We look at how VCTs work, the businesses they fund and who might consider one.
What are venture capital trusts?
VCTs enable individuals to invest in unquoted companies through trusts. The trusts invest the pooled money from their investors into small firms, providing them with the capital they need to grow.
Chris Lewis, chair of the Venture Capital Trust Association, told This is Money: ‘Where it has traditionally been difficult for retail investors to gain access to investments in high-growth, private companies, VCTs have provided a route to backing a portfolio of these start-ups and scale-ups.
‘VCTs offer the opportunity to invest in portfolios of AIM-listed companies too.’
Trusts have backed a number of what are now household names, giving them the funds they need to develop.
VCT-supported brands include non-alcoholic beer brand Lucky Saint, burger chain Five Guys, house hunting site Zoopla, fintech Wise and pasta delivery firm Pasta Evangelists.
Firms backed by VCTs employ an average of 68 people, compared to just 11 for the average small business. These firms currently employ almost 100,000 people around the UK.
In September, the VCT scheme was extended by a further ten years, meaning that it will continue until at least 2035.
Lewis said: ‘HM Treasury’s decision to formally extend the sunset clause for another ten years was testament to the importance of the scheme, and provides a significant boost for investor confidence. Rachel Reeves’ first Budget specifically mentioned VCTs, and her speech was introduced under the banner of “Invest, invest, invest”.
‘At a time when funding from the broader venture capital market has slowed and many start-ups have struggled to raise funds, VCTs invested more than £500m into scaling businesses last year.
‘This is a vital boost to the funding landscape in the UK, and testament to the value of the scheme to the national economy in terms of creating new jobs and creating wealth more widely.’
Data analytics firm Quantexa, for example, first secured VCT funding in 2016. As a result, the firm has now grown to be worth $1.8billion and delivers $100million of annual recurring revenue.
Vishal Marria, founder and chief executive, said: ‘[Venture capital fund managers] Albion VC and Dawn Capital have supported us from the beginning, providing valuable advice and feedback.
‘We are a UK founded business… working with global industry leaders. Venture capital funds and the support of our investors continue to play a vital role in our growth trajectory.’
Should you invest in VCTs?
VCTs are generally viewed as an investment option for those who have already maxed out their Isas and Sipps. This is due to the tax benefits of these wrappers, as well as the high-risk nature of venture capital.
VCTs do also have an attractive tax offering, being free from capital gains tax, as well as having a £500 tax-free dividend limit.
With Chancellor Rachel Reeves having recently increased capital gains tax in her Autumn Budget, to 24 per cent for higher rate tax payers and 20 per cent for those paying the basic rate, VCTs have become an increasingly attractive investment option.
Unlike an Isa, which has a £20,000 annual allowance, the VCT allowance is £200,000, meaning that these investors could save themselves up to £60,000 in upfront tax.
These tax breaks are offered in order to make smaller business investment attractive and are intended to compensate investors for the risk of backing smaller and younger firms
On top of this, investment in smaller companies is less impacted by wider market movements, meaning that it can prove a good way of diversifying a portfolio.
However, it is crucial to take advice before deciding to put money into a VCT, and you will also need to pass checks to prove you are a ‘sophisticated’ investor.
VCT-funded firms are far more likely to fail than the more established listed players. High risk can sometimes lead to high reward, but this is by no means guaranteed.
One estimate suggests that up to nine in 10 investments in the earliest-stage schemes could fail.
VCT investors need to be able to cope with the possibility of losing their entire investment, and should be able to leave it untouched for the five-year period they need to qualify for tax relief.
Lewis said: ‘The Chancellor’s mention of VCTs in her recent Budget speech has increased the visibility of VCTs as one of the core options for tax efficient investing in the UK; alongside pensions, ISAs and EIS.
‘VCTs are in some sense an “unsung hero” as a single investment into a VCT can give retail investors access to up to 100 companies in an existing portfolio.
‘Crucially, as VCTs scale and invest in new businesses, this diversification only increases across sectors and maturity of businesses. There are also the well known income tax and capital gains tax advantages of investing in VCTs.’
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