A venture capital trust, or VCT, is a company that is listed on the London Stock Exchange that invests in smaller businesses in need of early stage capital. VCTs offer tax breaks to UK investors, because they are used as a channel to move investment into small businesses or smaller AIM-listed companies that need it in order to grow.
A typical VCT will invest in between 20-70 companies. The funds can follow a number of different investment strategies, ranging from generalist – investing in unquoted companies across a range of different sectors – to AIM-focused VCTs which only invest in the smaller companies listed on the AIM segment of the London Stock Exchange.
VCTs should be viewed as higher risk investments than other funds, largely because their portfolios consist of companies that may quite easily go to the wall. On the upside, many of these companies have the potential to also experience very high short to medium term growth rates. Limited life VCTs are designed to exit their portfolios after five years (see tax benefits below) to provide investors with more confidence that they will get their money back at the end of that period. To achieve this, they invest using asset backed agreements rather than loan notes – this means they can reduce their losses in businesses that fail, for example by taking ownership of freehold property or machinery.
UK residents have access to a number of tax benefits when investing in VCTs, including 30% income tax credit on up to £200,000 each year when you buy shares in a new VCT offer and there is no income tax to pay on dividends from VCT shares. In addition, there is no capital gains tax when investors sell their VCT shares. However, you have to hold the VCT for at least five years to enjoy the tax relief benefits.
How can I invest?
Although VCTs are listed on the stock market, there is little trading in their shares, which usually trade at a discount. Some VCTs are running buy-back schemes in an effort to minimise the discount you would pay to less than 10%. However, the best way to get into them is either via a new launch, or a new offering of shares in an existing VCT.
It is often worth trading VCT shares via a stockbroker – this will help to minimise the discount to value you might receive. Also, bear in mind that the underlying investments can be VERY illiquid, even if they are AIM-listed. It can take time for VCTs to realise their investments. On the liquidity scale, they probably sit somewhere between private equity funds and REITs (real estate investment trusts).
Why is there a VCT ‘drought’ at the moment?
VCTs are proving popular this year, because many investors are using up all their ISA allowance and seeking other low tax formats for long term investment. VCTs have been one area they have turned to.
According to Kin Capital, one of the few firms that still has a VCT open for investment, the market is facing a similar capacity crunch to the one it faced in 2005/06, with those leaving it late missing out on income tax relief. Kin is currently promoting the Pembroke VCT, which is managed by Oakley Capital. The VCT has returned 124.5p over the four years of its lifespan, and is backed by a number of UK high net worth investors, including Charles Dunstone and Lord Wolfson.
Readers should note, however, that some VCTs are only available to high net worth investors, although it is still possible to find some on the market for between £2000 and £10,000 minimum investment.