VCTs bounced back last tax year, and are set to boom

by | Jan 20, 2022

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  • £668 million of VCT shares were issued in 2020/21, up 4% from a year earlier, and almost double the amount raised in 2009/10.
  • 40 VCTs issued funds in 2020/21 – down from 43 a year earlier, and 57 were managing funds, down from 61.
  • In the previous tax year (2019/20) investors claimed income tax relief on £575 million of investment – down 16% in a year. The number of VCT investors claiming tax relief in that year fell 11% to 17,725.

VCT statistics were published today: Venture Capital Trusts statistics: 2021 – GOV.UK (www.gov.uk)

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown:

“VCTs bounced back in 2020/21, raising 4% more cash than the previous year and almost twice as much as a decade earlier. The current tax year is expected to see even more cash flood in, as investors shelter their money from dividend tax rises in April. But while the tax benefits are impressive, VCTs come with huge risks, so we can’t let the tax tail wage the investment dog.

 

Demand for VCTs waxes and wanes depending partly on rule tweaks. In 2019/20 demand fell back because the rules were tightened to restrict where VCTs could invest, which made them a riskier prospect. The change was made in 2017, but it took effect more gradually.

It’s also driven by changes in tax rules, and the 1.25 percentage point rise in dividend tax is expect to trigger a bumper year for VCTs. Demand also soars every time pension allowances get less generous, forcing those with higher incomes and large pensions to look elsewhere for tax relief. They came close to record highs between 2017 and 2019, when the pension lifetime allowance dropped from £1.25 million to £1 million.

Tax-efficient investment gets more difficult as your income and your pension grow. The tapering of pension allowances for higher earners, the introduction of annual allowances and the shrinking of lifetime allowances have all meant investors looking elsewhere for tax relief. ISAs are a sensible first port of call, but once the annual allowance is used, they will cast the net wider, and VCTs offer substantial tax perks.

 

The right VCT investment doesn’t just offer tax breaks, it also aims to offer significant capital growth and provide a stream of higher dividends, which look particularly striking at a time of lower interest rates.

However, these investments are much riskier than mainstream options. Some of the companies they invest in are the growth stories of the future, whereas others will fail entirely. It means VCTs are sophisticated, long-term investments only suitable as a small part of significant portfolios. Investors also have less choice than in previous years: we’ve only seen this few VCTs once before in the past decade. It means more investors chasing fewer opportunities.

It’s also difficult to access the capital invested in the short term, because they invest in illiquid investments, which can be difficult to sell. They also usually trade at a discount to their net asset value, because second hand VCTs don’t offer up-front tax relief, so are less attractive to investors. It means they are niche, risky, long-term investments.

 

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