Most investors in venture capital trusts (60%) are using them as a way to save for their retirement, according to a survey1 from the Association of Investment Companies (AIC).
The typical VCT investor has 13% of their portfolio invested in these vehicles, which invest in small, young UK companies with high growth potential.
VCT investors have a range of different attitudes to risk. Almost half (48%) of respondents to the survey consider themselves as medium-high risk investors and a further 14% say they are high-risk investors. However, 28% of VCT investors classify themselves as medium-risk and 10% cautious.
Why do investors choose VCTs?
VCTs offer attractive tax incentives, including 30% upfront income tax relief, tax-free dividends and tax-exempt capital gains. These tax breaks are important to VCT investors, with 79% saying they are the primary reason they invest in the vehicles.
However, the same percentage of respondents (79%) say the growth potential that comes from backing young companies early is another reason they invest. More than half (55%) of VCT investors cite supporting innovation as a factor and the same number (55%) invest in VCTs to support UK entrepreneurs (see chart on next page).
There is general agreement that the current economic outlook in the UK and the possibility of a recession makes supporting smaller UK businesses more important, with more than three-quarters (76%) of respondents agreeing2.
VCTs invested £650 million in small UK businesses in the 2022 calendar year, a 21% increase on the previous year, when they invested £539 million.
Source: AIC/Research in Finance
When asked to rank how important the different tax benefits of VCTs are to them, 55% of respondents choose the 30% upfront tax relief as the most important. The next most popular benefit is tax-free dividends, with 28% of respondents rating these as most significant.
Tax-free dividends: spend or reinvest?
Most VCT investors surveyed reinvest their tax-free dividends, with 35% reinvesting them in other types of investment and a further 28% ploughing them back into VCTs. However, 29% say they spend their tax-free dividends3. While some respondents spend them on luxuries and hobbies, such as “golf subscriptions and gear”, “fun restaurants” and “holidays”, others rely on them for living expenses, with one respondent saying they used the dividends for “fuel bills” and another for “normal day-to-day expenditure”. Several respondents said that the tax-free dividends supplement their retirement income.
The various tax incentives are essential to investors’ support of the VCT scheme. Only 8% of respondents would still invest in VCTs if the upfront tax relief was removed and only 16% would still invest if the advantage of tax-free dividends was removed4.
In a free-text question with no prompted responses, VCT investors were asked to compare the benefits of VCTs to other tax-efficient schemes, such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and business property relief. Of those who offered a response, 24 said that VCTs were easier to invest in or more accessible; 19 cited the tax-free dividends as a comparative benefit; and 16 reckoned that VCTs were less risky than other tax-efficient schemes, though some of these respondents emphasised that VCTs were still risky compared to other, more mainstream investments.