Investors that want to take advantage of the tax benefits that come with investing in venture capital trusts (VCTs) should act quickly, according to experts, as the market has started to take off.
Already, popular fund Mobeus VCTs raised £35m in less than 24 hours last week. The firm, which has not taken in new capital since the tax year 2019/20, launched its fundraise on Thursday afternoon and by Friday it was already at capacity.
Jason Hollands, managing director of corporate affairs at Bestinvest, said: “The speed of the Mobeus fund raise is unusual, but it is certainly the case that the most popular offers can move very quickly and when capacity is limited, that means it is unwise to delay your VCT choices until the last month of the tax year as the strongest offers will almost certainly be closed.”
It follows on from a strong 12 months in the tax year 2019/20. Data from HM Revenue & Customs (HMRC) last week showed VCTs raised £668m from UK private investors, the fourth-highest total raised in a calendar year since their inception in 1995.
They have been growing in popularity as more people look to shield their wealth from the taxman. VCTs offer up to 30% income tax relief on the amount invested (capped at £200,000), which can be offset during the tax year that they buy. Any dividends or capital growth on the investment is also tax free.
However, VCTs are quoted private equity funds that buy early stage private companies, which is a high-risk approach. Additionally, investors must hold the shares for five years or they will be required to pay the money back to HMRC.
“There are a variety of likely reasons for surging interest in VCTs, including greater restrictions on pension allowances for higher earners, tougher action against aggressive ‘loophole-driven’ tax planning and the appeal of relatively high tax-free dividends that VCTs generate in a low-yield environment,” Hollands said.
“With personal tax allowances and the pension tax allowance frozen until April 2026, plus dividend tax increases coming in the new tax year, it is reasonable to expect demand for VCTs should remain buoyant.”
At present, there are 17 open offers available to investors, with a couple more expected to be released before the ISA deadline in April.
Source: Bestinvest
Hollands said The Northern VCTs were one of his top picks. The funds have traditionally invested in mature smaller companies that have the potential to be bought out, but since rules were changed in 2015 to force VCTs into buying start-up firms, the managers now buy early stage growth businesses.
“The combination of legacy holdings in more mature companies, backed when the rules were different, and earlier-stage companies gives these VCTs a more balanced profile,” he said.
“Examples include musicMagpie which listed on AIM last year (they part exited), Currentbody – an online market for beauty products and Native Technologies, which is a tech platform for detecting undiagnosed diseases.”
The Albion VCTs are also strong options for investors, he said, with the joint fundraising being split across the firm’s six offerings. “These provide access to legacy investments in income generating and asset backed companies, with a portfolio of unquoted growth capital companies in areas like tech and health sector,” Hollands noted.
Pembroke VCT, which invests in six main areas – wellness, food, beverage & hospitality, education, design, media and digital services – and Unicorn AIM VCT, which launched today, are also worthy of consideration, he said.