Venture Capital Trusts (VCTs)
Venture Capital Trusts (VCTs) are tax-efficient, UK investment schemes. They were created to provide capital for small, early-stage businesses and are popular among traders looking for an alternative to traditional shares.
This guide will explain how to start investing in Venture Capital Trusts, their advantages and disadvantages, and how the tax relief benefits work. We also list some of the best-performing brokers with Venture Capital Trusts.
What Are Venture Capital Trusts?
Venture Capital Trusts are investments in small or early-phase UK businesses that are listed on the London Stock Exchange (LSE). The concept of VCTs was introduced by the UK government in 1995, to encourage individuals to invest in new UK firms. Octopus Investments is one of the UK’s largest Venture Capital Trust providers, launching its first fund in 2002.
Venture Capital Trusts (VCTs) are similar to investment trusts. Retail traders will subscribe for shares in a growing firm, providing them with the funds to help them develop. Some well-known companies have originated from VCT funding including Zoopla, Graze and Gousto.
Typically, VCTs are overseen by fund managers with each fund typically holding between 20 and 70 companies. Although it can be an exciting investment prospect, Venture Capital Trusts are risky as the firms are still in the establishment stage.
Listing
Below are key listing requirements for VCTs:
- Must be listed on a UK stock exchange
- Firms registered under the VCT must not have any more than £15 million in gross assets
- Qualifying firms are permitted to raise £5 million in a 12-month period from capital trusts
- Organisations that receive income from Venture Capital Trusts must have no more than 250 full-time employees
One of the major advantages of trading Venture Capital Trusts is access to tax relief. Benefits include 30% income tax relief for up to £200,000 annual investment (so long as shares are held for a minimum of five years). Additionally, no tax is required on the dividends received from shares in Venture Capital Trusts and no capital gains tax (CGT) is payable on the disposal of shares.
VCTs are not, however, exempt from inheritance tax (IHT), but any dividend payments received will remain tax-free should your beneficiaries choose to keep the shares once inherited. This is different vs enterprise investment schemes (EIS) which qualify for business property relief and therefore are free of IHT after shares have been held for at least two years.
Types
There are three main types of venture capital trusts:
- Specialist – A collection of companies all focused within one sector. Diversification is lacking, meaning they may be riskier compared to generalist VCT profiles.
- AIM – Shares issued by Alternative Investment Market (AIM) organisations. The specialised group of companies listed on the London Stock Exchange (LSE) is often smaller and riskier than the major players in the main market.
- Generalist – A group of small firms operating in different sectors such as technology, property, and healthcare. Risks are reduced due to the diverse nature of the firms. Thus, if one sector struggles, the alternative sectors may outweigh the negative performance and protect the overall value of the VCT.
How Do Venture Capital Trusts Work?
VCTs permit multiple investors to pool their funds to purchase shares in the trust, which then makes investments into small, upcoming firms. Simply explained, if you invest in Venture Capital Trusts, your shares obtained are in the VCT rather that the underlying organisation.
Let’s say you invest in company A listed within the Albion Venture Capital Trust PLC. In this case, your shares would lie with Albion Venture Capital Trust rather than in company A.
Note, VCTs are less suitable for traders looking for short-term gains. And given the risks, many suggest that VCTs should not account for any more than 10% of an investment portfolio.
How To Invest In Venture Capital Trusts
You can buy VCT shares through an investment firm or via an online broker. Firms offering VCTs include Interactive Investor, Bestinvest, St James’ Place, and Hargreaves Lansdown (HL).
Typically, you will need to apply for shares when new Venture Capital Trusts are released onto the market. This is known as a new share offer and the process will vary between brokers.
Bestinvest, for example, has an offline process to apply for VCTs. An application form can be posted directly to the broker with a cheque investment or online bank wire transfer confirmation. Ensure you read the information provided and pay attention to the risks involved. You should also consider any costs and charges associated with investing before signing up. Once you have invested in a Venture Capital Trust, you will receive a share certificate confirmation and a tax certificate for tax relief purposes.
It is important to note that if you sell Venture Capital Trust shares within five years of purchase, you will be liable for repayment of the 30% income tax relief. Minimum investment amounts vary by VCT, however, these typically average around £5000. HMRC has imposed a maximum investment limit of £200,000 per year in Venture Capital Trusts.
Benefits Of Venture Capital Trusts
There are several advantages of investing in a Venture Capital Trust:
- Tax Relief – The tax advantages are a major incentive for VCT investors. This includes a 30% income tax saving on investments up to £200,000, no capital gains tax for the disposal of VCTs, and no payment for dividends.
- Economic Growth – Investing in UK Venture Capital Trusts are a feel-good trading method. Ultimately, your investment helps smaller organisations get started whilst also supporting economic growth in the country.
- Complementary To Alternative Investments – VCTs may be a useful addition to your existing trading portfolio. They can complement your existing long-term savings accounts such as ISAs or pension plans. You can invest up to £200,000 in VCTs per tax year, which is much larger compared to the current ISA maximum of £20,000.
Drawbacks Of Venture Capital Trusts
The drawbacks of investing in Venture Capital Trusts include:
- Difficult To Sell – The VCT market isn’t as active as purchasing shares in larger LSE-listed firms. If you try to sell your VCT shares, you may have to accept a lower price than the net asset value (NAV) of the VCT.
- Long-Term Investments – You must remain invested for a minimum of five years to maintain the tax credit, meaning VCT shares typically won’t provide short-term gains. Despite providing potentially high returns, trading Venture Capital Trusts is riskier than investing in larger, more established companies.
- Risk – As Venture Capital Trusts invest in smaller organisations that are not listed on the main market of the London Stock Exchange, they are prone to significant volatility. Investments in smaller companies can fall or rise in value much more sharply than shares in larger, more established companies (given their influence from external factors). They are also at risk of a higher failure rate, so be prepared to lose your total investment value.
How To Compare VCTs
Below are the important factors to consider when comparing and researching VCTs:
Investment Team
Spend some time researching financial advisors with experience in making early-stage investments. As such, access to their previous investment history and performance track records should be considered.
Fund managers that work with individual organisations will rank highly, demonstrating they back them for success from both an ROI perspective and for economic benefits.
VCT Size
The larger the Venture Capital Trusts, the more organisations it invests in. This means the risk is spread across a larger number of assets, increasing diversification. You should look for VCTs with companies at various stages of maturity. A mix of maturities and those in different growth stages can maintain a steady performance.
Additionally, consider performance measurement statistics, including access to dividends and growth potential in net asset value.
Investment Transparency
The best brokers and investment firms will provide full transparency of investment opportunities. Octopus Investments, for example, provides a comparison table of their live Venture Capital Trusts, with details such as the number of companies within the portfolio, net asset value, and examples of organisations included.
You should consider whether the line-up matches your personal interests, as well as firms that you are interested in backing for growth.
Exit Strategy
Does the fund manager have an appropriate exit plan in place? If not, do they offer a share buy-back scheme? Planned Exit Venture Capital Trusts will return investments to shareholders without the need to sell assets at a discount on the secondary market.
Fees
As investing in Venture Capital Trusts requires a significant amount of knowledge, investment companies often have higher management fees vs traditional managed trading. Fund managers, therefore, will have higher costs in return for their services.
This can often range in the region of 2-5% compared to funds and investment trusts with typical fees between 0.85% and 1% per year. Chelsea Investment Intelligence, for example, caps its annual VCT costs at 3.6%.
Having said this, there are several tax relief benefits involved with investing in VCTs.
Top 5 UK Venture Capital Firms
Below, we have curated a list of our top 5 investment firms offering VCTs, detailing some key features including fees, customer support and minimum investment amounts. All firms are regulated and licensed by the Financial Conduct Authority (FCA) in the UK.
Albion VC
Albion Capital Group is a London-based investment firm with 20+ years of experience. It currently manages over £1 billion in assets under management across 60+ companies. The brand aims to support innovative organisations with expert knowledge and long-term capital funding. Albion Capital Group focuses on the software and healthcare sectors in the UK.
Traders can sign up with a starting investment of £6,000, with a minimum subscription of £1,000 across their six VCTs. Initial fees are 2.5%, although the firm does an ‘early-bird’ discount of 0.5% for new shareholders. The average annual management fee is 2%.
Octopus Investments
Octopus Investments was founded in 2000, investing in people, industries, and ideas for the future. Their area of expertise includes healthcare, renewable energy, and property. The investment fund firm is a certified B corporation, meaning they provide a balance between their business activities with social and environmental good practise. The brand manages more than £12.8 billion in assets under management (AUM) for over 60,000 investors.
New clients can invest with a minimum of £3,000, though there is an annual management charge of 2% as well as a 20% performance charge. For any support, the Octopus investment teams are readily available during office hours via telephone and email.
SFC Capital
Previously known as Startup Funding Club, SFC is one of the most active early-stage investment firms (SEIS) in the UK. Established in 2012, the company has made 300+ investments in upcoming, innovative UK companies. The brand operates as a ‘people business’, looking to build long-term relationships with both entrepreneurs and investors and using a unique business model approach of a syndicate with its own-seed investment funds.
Traders can expect minimum tickets to invest at £10,000. To begin investing, traders need to fill out a simple online questionnaire via the website.
BGF
BGF was founded in 2011 as an independent investment company. Today it has invested over £2.5 billion in early-stage and small/medium private companies across the UK with 500+ backed businesses and 150+ exits. BGF aims to help good businesses grow, including supporting and championing the ESG credentials of their portfolio companies. BGF has 15 regional offices in the UK, all of which are available for all your investment queries.
MMC Ventures
MMC Ventures provides business scaling to technology companies predominantly in the UK. The firm has been funding organisations since 2000 and today has over £1.2 billion in assets under management. The company launched a £52 million seed fund in 2019 to support SMEs in London, part of the Greater London Investment Fund (GLIF).
Traders can expect to invest £25,000 for EIS funds at MMC Ventures, with an annual fee of 2.5%. Investment advisors are also on hand for support via telephone or email.
Should You Invest In VCTs?
Investing in Venture Capital Trusts in the UK is considered by many as ‘doing good’. Whilst it can come with a high level of risk, a more diverse range of companies included in the fund may help to avoid this. VCTs can be a good addition to existing investment portfolios, complementing a pension plan or Individual Savings Accounts (ISAs). The tax relief advantages are also attractive.
Before committing, spend time researching the most competitive investment firms, including those with low fees and a proven track record in successful trading.
FAQ
What Are Venture Capital Trusts?
A Venture Capital Trust (VCT) is an organisation that purchases shares in several upcoming, early-stage firms which are looking for investment to help develop their services. The tax-efficient investment product is typically overseen by an experienced fund manager with each fund typically holding between 20 and 70 SMEs.
Are Venture Capital Trusts Regulated?
Not all Venture Capital Trusts are regulated by the Financial Conduct Authority (FCA). Having said that, the best fund managers will be regulated and adhere to relevant rules and tax requirements. VCTs must be listed on the UK-recognised stock exchange.
Are Dividends From Venture Capital Trusts Taxable?
Dividends received by your VCT investments are normally tax-exempt and you will not need to declare them on your tax return. See our guide for where to buy Venture Capital Trusts with UK tax relief.
Should I Invest In Venture Capital Trusts?
VCTs are renowned for their high risk due to the volatile nature of start-up firms. Returns on Venture Capital Trusts may also be much slower than traditional short-term trades. However, they can be a suitable addition to existing investment portfolios, with a generous maximum investment limit of £200,000 per year.
What Are The Best Venture Capital Trusts To Invest In?
Some of the top 5 venture capital hosting firms in the UK include Interactive Investor, Bestinvest, Octopus Investments, Albion VC, and MMC Ventures. Do research into the current opportunities offered by these brands. There is also plenty of information published by HRMC to help you get started with the investment product. This includes a manual of qualifying holdings, how to open investment positions, and taxation rules of Venture Capital Trusts.