Kristy Barr, Co-Head of Retail Investments at Octopus Investments, dives down into why and how VCTs are increasingly providing advisers with unique opportunities to address clients’ tax-planning and portfolio diversification needs.
It’s rare for political parties to agree on policy. However, there is one area that has consistently received cross-party support across multiple Governments and that is the desire to support UK small businesses and the start-up ecosystem.
This support manifests in the form of generous tax reliefs for investors willing to back these companies. In turn, this creates opportunity for financial advisers to provide attractive tax-planning solutions.
The past few years we have also seen Venture Capital Trusts (VCTs) growing in popularity as the personal tax burden increased and investors are learning that they are a great way to invest their money in a tax-efficient way, over the longer term, as part of a diverse investment portfolio.
We believe the popularity of VCTs will only accelerate following the Budget last year.
Two reasons for this include:
- Stability in outlook: The legislation that backs VCTs has been extended until 2035. This offers clarity and continuity for long-term planning. Plus, VCTs have just celebrated their 30-year anniversary. Advisers can make recommendations with greater confidence.
- Tax efficiency amplified: Higher Capital Gains Tax rates (18%/24%) make VCT tax relief (income tax relief and tax-free dividends) even more appealing in reducing overall tax liabilities.
The significance of tax reliefs
Going into more detail on that second point, VCTs can make for an attractive income planning tool due to the combination of upfront tax relief and tax-free dividends. Investors can access higher levels of post-tax target returns associated with higher risk investing, while benefitting from the available tax reliefs.
It also provides the opportunity to advise on both tax planning and early-stage investments – a typically underserved sector, where our research from 2023 shows investors have unmet appetite. Among 200 UK financial advisers, just 17% thought their clients were interested in investing in early-stage companies, and yet, when roughly 1,000 UK adults with investments partly or fully managed by an adviser were asked the same question, 45% expressed interest1.
Interestingly, our follow-up research from 2024 showed a similar gap in demand. Only 23% of investors with a financial adviser had received advice on the opportunity of investing into early-stage companies. Yet more than double that number (56%) of investors wanted their advisers to talk to them about VCTs2.
VCTs can therefore boost investment in the early stages of dynamic, entrepreneurial UK companies that are a vital area of the UK economy while helping more people from across the UK make their money work harder for them.
Understanding the risks
There are, of course, risks that investors should consider. The generous tax reliefs for VCTs are provided as some compensation to investors willing to accept the additional risks that come with a high-risk investment.
The value of VCT shares, and income generated, can fall as well as rise. Investors may not get back the full amount they invest. Given the exposure to early-stage companies, the value of VCT shares can be volatile and they may be hard to sell.
Tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its qualifying status. Investors must be comfortable holding shares for five years or longer to keep any income tax relief they claim.
Help clients reach their goals and grow your business
VCTs are an accessible investment, with minimum investment sizes starting at around £3,000. The average investment value is around £15,0003, and once familiar, there is a high propensity for investors to revisit VCT investments every year as part of their annual tax and investment planning. As a result, VCTs can form a valuable part of an adviser’s business. So, while cases sizes can be of a smaller size, the cumulative impact for an adviser’s business could be significant.
Advisers are now also finding that VCTs are useful for a much broader range of clients than initially thought and we’re seeing the breadth of clients continue to increase. The age of an Octopus VCT investor is trending younger, in 2018 the average investor was 63 down to 54 in 20234. These changes illustrate that VCTs are being utilised for a wider set of planning needs than previously and are continuing to become a more mainstream part of investing.
There’s also the increasing number of taxpayers getting caught in the 60% “tax-trap” whereby the combination of additional rate tax and the tapered personal allowance combine to an effective 60%. For clients who are comfortable with the risk, investing in a VCT allows them to offset their income tax bill and diversify into private, early-stage companies.
In this post-Budget environment, we see it as a great opportunity for advisers to consider VCTs and integrate them into their offering as a unique selling point. Doing so could support advisers in delivering good outcomes for both their clients and their business.
This article was featured in our Venture Capital Trusts (VCT) Annual Report 2025, which you can read in full here.
About Kristy Barr
Kristy Barr is Co-Head of Retail Investments at Octopus Investments. She joined Octopus Investments as Head of Sales and Customer in September 2021, coming from Abrdn, where she was responsible for the key strategic partners of Aberdeen Standard Investments and Standard Life. Kristy was previously Head of Institutional, Europe for BMO Global Asset Management and spent 15 years in various sales and client management roles within hedge funds and real estate.
Sources
1Opinium Research, survey of 1020 UK Adults with investments partly/fully managed by an adviser and 206 UK IFAs, April 2023
2Opinium Research, survey of 1000 UK Adults with investments partly/fully managed by an adviser and 200 UK IFAs, June 2024
3Adviser applications for the tax year 2023-2024, Octopus Investments, September 2024.
4Octopus Investments, September 2024.
