Already-successful investors who are willing to move further up the risk/reward scale – and are hoping for additional tax advantages – may want to start thinking about venture capital trusts (VCTs), according to Chris Hutchinson, portfolio manager at Unicorn Asset Management.
VCTs often invest in businesses before the major financial institutions even know they exist, and well before their potential success whips up a media frenzy and the free-for-all that might ensure, said Hutchinson.
The tale of Fever-Tree – a producer of premium drink mixers founded by Charles Rolls and Tim Warrillow in 2004 – rising from humble beginnings to worldwide acclaim has secured a place in the annals of British entrepreneurial success stories. Investors who got in on Fever-Tree early, well before the successful 2014 IPO on AIM [Alternative Investment Market], were able to realise the highest gains.
Share price performance of Fever-Tree since IPO
Source: FE Analytics
Hutchinson pointed out that all the great business successes of tomorrow are currently being nurtured across this country, and need the same thing to get them off the ground – money.
“The UK is known as a nation of shop keepers,” he said. “There are hundreds of thousands of small businesses, if not millions, in this country. They’re typically founded by someone with a good idea.”
The manager runs the Unicorn AIM VCT, as well as the Outstanding British Companies fund. He said that as well as offering access to early stage growth stories, a VCT (venture capital trust) offers three distinct tax advantages to investors.
“First, for every pound you put in a VCT, buying new shares, you get 30p back on your next income tax bill. So, you’re effectively buying £1 of assets for 70p on day one,” Hutchinson explained.
“Then you’re exempt from dividend tax, meaning that you pay no tax on any dividends you receive from the VCT. The third tax advantage is that at the end of the five years, you pay no capital gains tax from selling your shares.” 
If you buy a VCT on the secondary market, you won’t receive tax relief on your initial investment, but you will still receive tax-free income and capital gains.
The income tax benefit is also contingent upon keeping the shares for at least five years.
Further, Hutchinson (pictured) said that there are other considerations to bear in mind; for example, he said they are not for the fearful investor.
“If you have serious worries about risk of loss of capital, don’t even consider investing in a VCT,” he said. “It is a relatively high-risk investment. It’s a relatively small collection of early-stage businesses, many of which will fail despite the best effort of the entrepreneurs and fund managers. That’s just the way business works.
“It is most suitable for investors who are already quite successful.”
The manager expanded on this point by saying these vehicles are most suited to people who are close to their lifetime pension allowance, have paid off their mortgage, use their full ISA allowance every year and still have additional disposable income.
“It’s the jam on top of the cake,” he said. “It’s for people who want to feel like they’re making a contribution, helping these small businesses, with the prospect of potentially getting a nice return.”
Once you have decided to invest in a VCT, it’s time to start performing due diligence on the range of VCTs available.
Hutchinson said you should look at those with a lengthy and successful track record.
“Over that period of time has it done a good job? Sure, there will be up and downs, but has it been up more often than down? Has it been consistent?”
He said there is a wealth of information available about VCTs and their investments.
“For example, look at the top-10 companies in the portfolio and ask: ‘What are these businesses? Are they losing money? Are they consuming a lot of cash? Have they got a lot of debt? Are they in a position to pay dividends? Are they growing?’ and so on.”
The Unicorn AIM VCT aims to provide shareholders with an attractive return from a diversified portfolio of investments, predominantly in AIM-quoted companies, “by maintaining a steady flow of dividend distributions to shareholders from the income as well as capital gains generated by the portfolio”.
Its highest sector exposure is to telecom, media & technology (26.5 per cent), biotechnology and medical (18.5 per cent) and financial services (9 per cent).
Among his most successful investments, Hutchinson cited ABCAM, the largest holding in the fund. “The name is a shortened version of Antibody Cambridge. It’s a business that started very small, about 14 years ago. It sells vials of liquid that are terrific antibodies to the pharmaceutical research market worldwide.”
Another success story is Tracsis, a software company that aids planning, scheduling and reporting in the transportation sector.
Gasgrove, a digital and communication services business, is another major holding that has done well over the years.
Fund performance versus sector
Source: FE Analytics
The £208.0m Unicorn AIM VCT has returned 332.31 per cent since launch in February 2007, compared with 23.93 per cent from its IT VCT AIM Quoted sector. It trades at a 13.1 discount to net asset value (NAV), has ongoing charges of 2.24 per cent and is yielding of 4.7 per cent.