VCTs – not just for affluent investors

21 March 2023

The latest HMRC stats show VCTs are firmly in the mainstream, says Matt Currie, head of Growth Capital at Seneca Partners He looks at why they are now more relevant for a wider range of investors.

Recently released HMRC statistics for the 2021/22 tax year speak loudly to the ever growing popularity of VCTs amongst investors – as trends reveal these vehicles are no longer the preserve of affluent investors.

The statistics also point to increasing maturity in the VCT market as more funds are being generated by fewer established VCT managers whose track records are showing to stand the test of time:

– 2021/22 saw £1.122 billion raised, a 68% increase from the previous year and more than double from 2009/10.

– There were only 52 VCT managers in 2021/22 compared to 75 in 2016/17 – which is half the number of those in 2010.

– The number of VCT investors claiming tax relief grew by 10% to 19,475 when compared to the previous year.

– 83% of investors claimed tax relief on amounts of £50k or less with 17% claiming £5k-£10k.

What does this tell us?
The proof of the importance of VCTs to both investors and British business can be seen from the success they have had in attracting money. The most recent data from the government shows VCTs to be booming despite the impact of the pandemic and they have helped a huge number of businesses in their near 30-year existence. Anecdotally, it seems as though the current tax year is on track to beat all previous records with more than £800 million set to be raised based on current open offers and current limited availability.

Undoubtedly, the reduction in lifetime allowances on pensions in recent years has made traditional pensions less attractive. Also, pension freedoms which allow for cash to be released from pension pots rather than having to buy an annuity means alternatives such as VCTs are on many more radars.

The ability to use seasoned VCT providers as a means of generating tax free dividends alongside capital growth potential has struck a chord for many investors.

It remains to be seen whether the proposed abolition of lifetime limits in the March 2023 Budget will affect investor sentiment. However, by the same token, the UK government has stated its intention to stimulate the economy and measures to support small growing businesses – and unlocking their potential is likely to be the subject of ongoing stimulus. The Chancellor has stated that the sector will be assessed in the period running up to his Autumn statement where the mandate appears to be how to increase the success rate of small entrepreneurial businesses by ensuring they have sufficient funding for growth.

The latest statistics from HMRC are not surprising and very much in line with what we hear from our investors and many of the IFAs we work with. A venture capital component within individual investment portfolios has become a desired asset allocation within sensible parameters and the performance and stability provided by VCTs over time has given added comfort to investors. Additionally, the inherent tax advantages of VCTs and their EIS cousins are an excellent way to be involved in venture capital.

These figures reflect possible normalisation following Covid, though it will be interesting to see how the current year fares after numerous significant headwinds. With the forecast economic gloom possibly not materialising to the initially projected extent, there are early indications that March will once again be a very active month ahead of tax year end.

It is interesting to see the number of VCT managers declining, whilst amounts raised are heading significantly upwards as the market continues to mature. It also appears that investors are wisely spreading their annual VCT commitments across different managers with due regard for the varying investment approaches.

This all adds up to the conviction that VCTs are rapidly becoming an investment staple for a widening range of investor types.

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Professional Paraplanner