As the tax year-end approaches, Vince Keen, Blackfinch, highlights the reasons why he believes that advisers should consider the benefits of newer VCTs as part of the due diligence process
Established tax planning tool
2020 was a silver anniversary for Venture Capital Trusts (VCTs). It is over 25 years since the UK Government launched these tax-efficient vehicles to encourage support for new and growing firms. To offset investment risk, VCTs offer 30% Income Tax relief (minimum holding period five years); gains exempt from Capital Gains Tax on sales of shares; and no Income Tax on any dividends.
Over the years, they’ve become popular with investors, reflected in fundraising amounts. In the tax year 2019/20, VCTs raised £619 million. While, due to the impact of the coronavirus pandemic, this was lower than in 2018/19, it reflects the continued appetite for VCTs. (Source: The Association of Investment Companies, 2020). With tax mitigation always high on the agenda, VCTs continue to feature in client portfolios.
Benefits of newer VCTs
Within the VCT investment landscape there is a wide range of offerings. Investors can select from older VCTs, with many operating since the 1990s, through to newer VCTs launched in the last two years. With VCTs so well established, and all subject to HMRC’s strict criteria, investors can consider the benefits of newer offerings.
These may offer greater growth potential through a more concentrated portfolio of high-quality, early-stage companies. Firms’ adaptability and resilience in the face of the pandemic are now integral to investment teams’ considerations.
Shares in innovative new firms, that are well positioned for the future, can help to deliver excellent growth. This is alongside creating more diversification in a client’s portfolio. These kinds of investments can also make for a greater positive environmental, social and governance (ESG) impact. It’s worth exploring these aspects in more detail.
High performance hurdles
Older VCTs will contain a portfolio of mature holdings which might, on first glance, appeal to investors. However, one possible drawback of investing in these vehicles are fees which could dilute future returns.
Many of these VCTs will have long ago passed through their hurdle for performance fees, which could dilute future growth for both existing and new investors. In contrast, newer VCTs will need to surpass their hurdle before a performance fee is payable, rewarding those investors with a greater share of the growth.
Unlisted, technology-enabled companies
There’s also a question around how well equipped older VCTs’ investee firms are for the pandemic, and the post-pandemic world.
This is another reason to consider newer VCTs. They will likely be focused on pioneering early stage, unquoted companies (which are not directly correlated to the listed companies/market volatility).
Newer VCTs may also be investing in technology enabled firms. As these businesses are often web-based, offering their services online, they’re able to meet the pandemic head on. They could in some cases even benefit from upheavals. As customer trends evolve due to social distancing they can start to serve new requirements.
One effect of the pandemic has been to accelerate the adoption of digital technologies by several years. Technology-enabled firms have therefore typically been least impacted by global lockdowns, and quite often the beneficiaries of them. Newer VCTs, especially those with a technology focus, are likely to have a much higher concentration of such firms in their portfolios than older ones.
It’s useful to note that a new VCT has three years to deploy a minimum 80% of its capital into qualifying companies, with 30% of this needing to be invested within its first two financial years. This gives the investment managers time to assess deals over time, and gradually build a diverse portfolio of firms with strong post-pandemic growth prospects.
Prospect of dividends
Investing in a newer VCT can therefore bring the prospect of dividends. These could include special dividends from early exits, along with the objective of paying regular dividends in the future as the VCT matures.
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