Understanding Venture Capital Trusts
7 February 23
7 February 23
5 myths about Venture Capital Trusts (VCTs)
Don’t believe everything you hear about this useful - but often misunderstood - investment vehicle
Since their launch in 1995, Venture Capital Trusts (VCTs) have had a seismic impact in stimulating entrepreneurial growth, innovation, and jobs across the UK. Their focus today is investing exclusively in innovative smaller companies that are a crucial driver of the economy.
It’s easy to see why their popularity has surged among investors and savers. There are a range of benefits beyond backing exciting growth companies. VCTs can act as a valuable retirement planning option, they can help investors generate additional income, and can also complement other investment arrangements.
However, some advisers can be sceptical about VCTs and point to fears around the complexity, performance, and tax benefits. Here, we debunk five key myths around VCT investing.
You can only get tax relief on earned income
This is simply untrue. You can get tax relief on many types of income, whether that’s your salary, property rental income or dividend income.. And indeed VCTs were designed to be an attractive and tax-efficient investment, because of the importance of the start-up sector to the UK economy.
Tax rules can change, but VCT investors currently enjoy up to 30% of upfront tax income tax relief.
The average VCT investment is over £100,000
The idea that VCT investments are exclusive to large city bonuses is quite widespread, and very far of the mark. In fact, HRMC recently published data showing that the average investment into a VCT in the 2021-22 tax year, was £33,000.
Whilst the data shows that some investors are still fulfilling the maximum investment amount of £200,000, HRMC’s data is showing that less than 10% of all investment into VCTs were over £100,000.
Advisers face a big administrative burden
The idea that VCTs are an especially complex investment vehicle is persistent, but doesn’t stand up to scrutiny. Claiming the tax relief on a VCT is relatively straightforward.
For advisers, the ability to purchase and manage client's investments via platforms has helped to digitise the investment process helping to broaden the market and appeal for VCTs further.
Not only that, clients who self-assess simply claim VCT tax relief when they file their tax return. Those on PAYE need to provide their VCT tax certificate along with a copy of their P60. They don’t even need to declare any dividends.
As an investment vehicle, VCTs perform poorly
There used to be some truth in this, but it no longer applies. Back in the mid-noughties, VCTs enjoyed tax relief of 40%, leading to aggressive allocations and some poor investment decisions.
But the VCT market has changed, and managers have become far more discerning. In fact, the majority of VCT managers today have been managing VCTs for decades through multiple economic cycles and can demonstrate strong track records of investment performance. Many VCTs (our own being a case in point) now conduct in-depth quantitative and qualitative analysis on target companies as part of a robust investment process.
The result? Research on 10 generalist VCTs in the decade to September 2022 found they outperformed the main stock market.
Start-ups are by nature more volatile than long-established businesses, but the overall performance of VCTs is now at least comparable to other popular investment products.
Any dividends are taxed
The opposite is actually true, and is one of the main benefits of investing in a VCT.
While it is true that most dividends from investment products are considered taxable income, that’s not the case with dividends paid by VCTs. You don’t even have to declare them on your tax return.
Again, VCTs are designed as a way to channel money into the start-up sector, to help good young businesses access the investment they need to thrive. For that reason, the tax benefits are deliberately generous. The absence of a dividend tax is just another advantage of this important but sometimes misunderstood investment vehicle.
The Triple Point Venture Fund VCT carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change.Tax reliefs depend on the VCT maintaining its qualifying status. Investors should only subscribe for shares on the basis of information contained in the Prospectus which is available via the Documents section of the website. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority.