The UK government’s recent decision to extend the sunset clause for Venture Capital Trusts (VCTs) through to 2035 was a welcome boost for both investors and financial planners.
By maintaining the availability of upfront income tax relief, the government has signalled its ongoing commitment to VCTs as a valuable tax-efficient investment option for investors interested in supporting UK growth companies.
For investors, the appeal of VCTs lies in their unique tax advantages. While VCTs offer up to 30% upfront income tax relief – slightly less than the up to 45% pension relief taxpayers can claim on pension contributions – VCT shares need to be owned for a minimum of just five years to retain the upfront tax relief.
After this period, investors can then sell their VCT shares free of any Capital Gains Tax (CGT) and reinvest in another VCT to claim a further round of tax relief.
Additionally, for those clients seeking tax-efficient income, VCT dividends are not subject to dividend tax. This feature is increasingly attractive given the dividend allowance was halved in April 2024 to just £500, making VCTs a more compelling complement to other tax-advantaged investments, such as pensions and Isas.
It’s easy to see why VCTs come with such attractive tax benefits – after all, the original purpose of VCT legislation was to stimulate investment into young, ambitious UK businesses which may otherwise struggle to get the capital needed to fuel their growth ambitions.
These incentives aim to encourage investors to channel funds into sectors of the economy that drive innovation, employment and long-term growth potential.
See also: Financial planning scenarios for VCTs
However, identifying and nurturing these dynamic growth companies is both an art and a science. For example, we find and back companies at an earlier stage of their growth journey, usually at pre-seed or seed stages, because we believe this is where meaningful returns begin.
We also focus on Business to Business (B2B) companies because, quite simply, the data shows us that they stand the best chance of being sold for a profit.
Why does early-stage investing matter?
For three important reasons. First, investing in early-stage companies means supporting visionary founders with ideas that could become world-renowned companies. Without the financial support these companies need, those ideas may never get off the ground.
Second, early-stage investing boosts economic growth and helps create jobs. As they grow, early-stage companies start to increase their revenue and take on more employees, making an important economic contribution.
And third, early-stage investing gives investors the chance to own a stake in a company that could turn out to be a global game-changer.
While the risks associated with VCT investment are high, there’s also potential for significant returns. Many start-ups, particularly those at early stages, face a high failure rate, which makes diversification essential.
By investing in a broad range of portfolio companies and sectors at different stages of maturity, VCT managers can help mitigate individual risks and reduce the impact of any single company’s failure.
This strategy allows for a more balanced portfolio, where the performance of successful companies can offset the losses of others. Additionally, VCTs offer valuable diversification benefits to client’s overall investment portfolios, especially for those looking to broaden their exposure beyond traditional asset classes. This not only helps reduce the overall risk but also enhances the potential for long-term growth.
See also: VCTs: Resilience and future prospects
For advisers, educating clients about the importance of risk tolerance and matching VCT investments with the appropriate financial goals is vital. VCTs are high-risk investments, with the potential for significant reward.
It’s therefore important for advisers to guide their clients in selecting VCTs that suit their individual risk profiles—whether they’re focused on long-term growth or more cautious capital preservation.
With the UK government extending the tax reliefs associated with VCTs for at least another 10 years, the VCT industry has received a show of support. T
his creates a compelling reason for more financial advisers to consider VCTs as part of a well-diversified client portfolio – providing them with the growth potential and upfront tax reliefs that other investment vehicles or asset classes may struggle to achieve. The high-growth potential of UK companies is there for all to see, and VCTs are a great way for more investors to participate.
Diana French is retail strategy director at Triple Point
