Why consider investing in a Venture Capital Trust (VCT) this year 

by | Feb 1, 2023

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Written by Stuart Mant, Head of Business Development, Albion Capital 

The last few years have undoubtedly been some of the most challenging of recent times; the ongoing impact of the Covid-19 pandemic, the Russian invasion of Ukraine, spiralling inflation and rising interest rates have created market turmoil of the sort not seen for over a decade.

This geopolitical, macroeconomic uncertainty and market volatility is not fleeting, though as yet it is unclear for how long the wider economy will be disrupted. For the right type of investor, every economic crisis presents an opportunity – and this is no exception. 

One investment vehicle that is worth exploring in this context is a venture capital trust (VCT). Introduced in 1995 by the then Chancellor, Kenneth Clarke, VCTs offer retail investors generous tax incentives in return for supporting smaller UK companies. Today, these reliefs include 30% income tax relief, tax free dividends and no capital gains tax on disposal. The scheme has proved popular and the VCT sector now has around £6.7bn of funds under management, supporting 1,100 ambitious companies. 


VCTs typically invest in private, early stage, entrepreneurial companies across a broad range of sectors and expose investors to an asset class that is otherwise difficult to gain access to. The early-stage nature of the businesses that VCTs invest in means that they provide a useful diversification tool, offering investors exposure to a ready-made portfolio of smaller companies with the potential for high growth. Whilst the rewards can be greater, investing in smaller developing companies is generally considered higher risk than more established companies 

VCTs should appeal to investors with their eyes on the horizon. Typically, they are held for a minimum of five years, as this is the required threshold to qualify for the full tax-relief incentives. The long term nature of the investment makes VCTs an attractive choice for investors looking to ride out short term market volatility and access companies in sectors that can thrive at a time when growth is subdued. Some investors may be buoyed by the idea that by investing through VCTs they are helping supply much-needed capital to UK-based entrepreneurs and helping fuel the next generation of British prosperity. 

Historically, the first few months of the year have been a popular time for financial advisers and investors to consider VCTs, and a significant proportion of funds are raised in the first quarter of the year. This may be because many people will have completed tax returns in the lead up to the 31 January deadline and want to look at tax planning for the current year. As the New Year offers an opportunity for reflection, others are beginning to think about income in retirement, or the advantages of investing in smaller UK businesses and supporting entrepreneurs: diversification with the potential for attractive returns. 


Anticipating demand, many VCT managers have launched new offers in recent months seeking to raise varying amounts. According to Martin Churchill of the Tax Efficient Review, VCT supply totals around £1.2bn this tax year and over £500m has been raised so far. Capacity is therefore still available for those that wish to consider investing. However, supply is limited, and offers from the better performing managers tend to sell out quickly. 

So, what is the future of VCTs? Over the last year the VCT industry has looked towards Whitehall with trepidation. The ‘sunset clause’, introduced in 2015 as a requirement of an EU state aid notification, stipulated that VCT income tax relief will no longer be given to 

investments made on or after 6 April 2025, unless the legislation is amended to make the scheme permanent, or the ‘sunset clause’ is extended. This would significantly impact VCT fundraising and in turn the early-stage companies that they back for growth. The Chancellor has recently confirmed that VCTs will be extended beyond 2025, although the exact terms of the extension are still unknown. It is also encouraging that the Labour party appears supportive of the VCT scheme. This is reassuring news for advisers, investors, and entrepreneurs alike. 


Alistair Candlish, Director of Carrington Wealth Management says “The last few years have proved the value and importance of VCTs to the UK economy and, whilst recognising that there are difficult times ahead, it’s great to see that this government and the opposition party are in agreement that the current framework for promoting and helping entrepreneurs and young companies is working, fit for purpose and will be supported in the future.” 

“VCTs have delivered attractive returns to shareholders and the most established VCT managers have an enviable track record of investing in early-stage businesses, growing and supporting those companies over time and exiting them, as they mature, at a multiple of cost, often to global corporations.” 

Since their inception, VCTs have been responsible for backing some truly exceptional founders whose businesses have gone on to be acquired by some of the biggest companies or institutional investors in the world. For example, Albion Capital’s exit of Credit Kudos in 2022, a fintech company that enables lenders to make faster and more informed decisions, was acquired by Apple generating a 5.2x return on cost in just two years. Another example is British Smaller Companies’ partial exit of Matillion in 2021, a leading provider of cloud-based data extraction that was partially acquired by US institutional investors at a 10.8x return on cost. 


With market volatility set to continue in 2023, VCTs present an increasingly compelling investment vehicle this year, helping investors ride out the current economic turmoil with more patient capital and back the next generation of emerging UK businesses in the years ahead.

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