Venture Capital Trusts (VCTs) are investment companies, listed on regulated markets such as the London Stock Exchange, which typically invest in unquoted shares.
VCTs were launched in 1995 as vehicles to encourage UK resident private investors to invest in small higher-risk UK unlisted companies which needed start-up, early stage or expansion capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis. A small number of VCTs are “self-managed” by their directors.
A VCT often offers exposure to a professionally run portfolio of investee companies, which include new shares of privately owned companies and new shares of companies that are traded on the alternative markets, such as the AIM and NEX Exchange. The fund manager appointed by the VCT to manage its funds, invests in companies to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value. However, as with any equity investment, the capital is at risk and investors should remember that VCTs are buying shares in small, often privately owned and young companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies.
VCTs make an important contribution to the economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £5 million and so are beyond the means of most individual investors.
VCTs themselves are subject to regulation by tax law, company law and the listing rules of the recognised investment exchange on which they are listed. VCTs commonly fall into three broad sectors: generalist (which covers private equity including development capital), AIM and specialist sectors e.g. technology or media.
Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT.
There are also VCTs that aim to exit from all of their investments, wind up the VCT and return all capital to their investors after a defined term (of, say, eight years). These planned exit VCTs typically focus on investments with a higher degree of asset backing or contractual income, as this can make exiting from these companies at a defined point in the future more predictable. However, with the introduction of the “risk-to-capital” condition (effective for all investments made by a VCT on or after 15 March 2018), planned exit VCTs are now relatively rare.
VCT investments offer:
- tax free capital growth
- tax free dividends
- income tax relief at up to 30%
In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in a withdrawal of the tax reliefs.
Being an equity investment, investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. Given that small and medium sized companies can take time to grow, and an exit may not be immediately apparent for shareholders. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest.
For further details of the investment risks please see the Key Risks section of this website and for further details of the tax advantages please see the Tax Treatment section of this website. Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.