Venture Capital Trust
A Venture Capital Trust (VCT) is a company whose shares are traded on the London stock market, similar to companies like NatWest or EE. However, instead of operating in banking or telecommunications, a VCT focuses on generating profits by investing in smaller companies who are seeking additional funding for business development.
This sector plays a crucial role in the economy, enabling companies to expand their businesses through funding from venture capitalists. Typically, a VCT invests in around 20 small businesses, which are selected by the VCT manager who will be an expert in identifying opportunities among emerging companies and securing favourable deals for investors.
To incentivise investment in this essential sector, the government provides generous tax benefits, including potential tax relief of up to 30% on investments.
It’s important to note that tax rules can change, and benefits depend on individual circumstances.
Profits earned by VCTs are commonly distributed to investors as tax-free dividends, serving as the primary source of return. The VCT manager also contributes expertise to help the chosen companies grow, aiming to sell their share of the business three to seven years after the initial investment and then reinvest the capital in new opportunities.
While VCTs offer an exciting investment proposition, they come with inherent higher risks due to the volatile nature of smaller companies. The shares can be challenging to buy and sell, and their market price may not accurately reflect the underlying investments. Investors should be wealthier and sophisticated, capable of taking a long-term view. The prospectus of each VCT provides comprehensive details of the risks and should be thoroughly reviewed before making an investment. These documents are available via the GrowthInvest platform, along with detailed information about each VCT.
Benefits of VCTs
Investing in small companies through the EIS can return large profits if companies flourish, however others might face challenges or even fail.
Investors can claim up-front income tax relief of up to 30% on their investments.
Dividends from VCTs provide a tax-free income for life, serving as an excellent source of regular income from a diversified VCT portfolio.
As VCTs typically invest in earlier-stage companies, they provide an additional angle for portfolio diversification.
Each VCT usually invests in 20 or more early-stage UK businesses which show promise.
Risks
Like all investments, there is a risk of losing the invested money in VCTs.
The risks associated with Venture Capital Trusts are generally higher than with other main market investments due to their focus on smaller, more volatile companies that are prone to failure.
VCT investments are suitable for experienced investors with no immediate liquidity needs who can withstand a potential total loss.
While there is a growing secondary market, VCTs are less liquid than other stock market investments, making them harder to sell.
It’s advisable to consult a regulated financial adviser for more information.
VCT Tools
Click to see how using our VCT Rolling Program works in practice
Click to see when there may be increased liquidity in the VCT market
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VCT Investment FAQs
A Venture Capital Trust (VCT) is similar to an investment trust, listed on the London Stock Exchange, investing in young, innovative companies seeking additional funding for business development.
VCTs mostly invest in small, entrepreneurial businesses in various sectors, providing an additional angle for portfolio diversification.
Generalist VCTs invest in a wide range of small, unquoted companies. AIM VCTs focus on new shares issued by AIM-quoted companies. Specialist VCTs concentrate on one sector, like media or healthcare.
The maximum amount is £200,000 per tax year, with a minimum investment varying depending on the VCT.
By investing in a VCT you are able to benefit from up to 30% upfront income tax relief. Thereafter you will receive tax-free dividends and tax-free growth should the VCT deliver a capital return as well.
VCTs focus on small, often early-stage companies, which naturally carry higher risks. Many of these portfolio companies may be unquoted and therefore illiquid and difficult to value. The VCT manager tends to be heavily diversified to mitigate these risks, some portfolio companies mail fail and some may deliver big returns. There is always an additional risk that the tax relief on these products may be withdrawn, however the scheme is very important in delivering much needed capital to the companies that are growing our economy, and with that the government (along with all parties) are very supportive of such schemes.
Historically it was difficult to sell shares in VCTs. But fortunately GrowthInvest has changed that, with our VCT service and Rolling VCT program. If you want to sell your VCT’s please tell your adviser or contact a member of our client services team. They can guide you on when there will next be buy side liquidity in the market, and assist you in making the sale. Proceeds will simply flow back onto the platform, then you can easily invest in new VCT’s or withdraw the funds if you need to. View our VCT Case Study to find out more.
