TLDR: Understanding Venture Capital Trusts

A record £1.13bn was invested in VCTs in the 2021/22 tax year and £1.08bn invested in the 2022/2023 tax year.

The UK is the biggest venture capital market in Europe, with a rise in the number of unicorns (privately held companies valued at over $1bn) to 144 in 2022.

The importance of diversification

Venture capital trusts (VCTs) offer investors access to a portfolio of early-stage businesses while also providing diversification. VCTs invest in a carefully selected range of companies at different stages of development, helping to spread the risk associated with investing in start-ups.

Selecting the right VCT

There are three types of VCTs: generalist, specialist, and VCTs that invest in companies listed on the Alternative Investment Market (AIM). Generalist VCTs invest in various industries, specialist VCTs focus on specific sectors or industries, and AIM VCTs invest in AIM-listed companies.

Advisers should consider a VCT’s strategy, focusing on risk management and identifying companies with growth potential and a clear path to profitability.

Tax reliefs

Investors in VCTs can claim tax reliefs, including upfront income tax relief of up to 30%, tax-free dividends, and tax-free capital gains. Individuals can invest up to £200,000 per tax year and claim income tax relief of up to £60,000, depending on their investment value.

Risks

Investing in VCTs carries risks, including value fluctuations and potential losses. VCTs invest in smaller, more volatile companies, which can impact the overall performance of a portfolio. The UK government offers tax incentives to encourage investments in innovative sectors.

In conclusion

VCTs offer opportunities for investors to contribute to economic growth and innovation in the UK. However, they require judicious and informed investment strategies to realize their benefits. VCTs will continue to play a pivotal role in supporting the UK’s venture capital success story.