Venture capital trusts – investing in the future of UK smaller companies

Venture capital trusts (VCTs) were launched in 1995 to encourage investment into smaller UK companies and to fill the investment gap that exists for companies looking for certain levels of funding.

To give you an idea of how this works, consider the average amount invested into a smaller company by a VCT such as Pembroke, which would be just over £1 million. Generally speaking, this size of investment is out of reach for an individual investor, but too small for traditional banks and general equity firms to consider.

So VCTs were created to address this gap in the market and also to offer individual investors exposure to the kinds of early-stage, highly entrepreneurial ideas they might not be able to access via regular funds.

Given the nature of these kinds of smaller companies, it is important to understand that a VCT is considered a high risk investment. For this reason, buying new VCT shares comes with a number of tax benefits to encourage investors:

  • 30% income tax relief when purchasing into new VCT fund raisings, as long a shares are held for at least five years*
  • All dividends are free of income tax
  • All dividends are free of capital gains tax. 

What are you investing into?

Providing you are comfortable accepting the risks, the underlying companies into which a VCT invests may be some of the most innovative that the UK has to offer.

A VCT manager and their team will often try to find companies that:

  • Have a unique idea 
  • Are market disruptors (have a different and better way of doing things to their competitors)
  • Have a product or service that is difficult to replicate.

If a company does well, there are then two options for the VCT. The first is that its managers can then wait for an acceptable offer to come in from an interested buyer, which will allow them to 'exit' the investment. The money received will then be reinvested into new ventures, paid as tax-free dividends to investors, or usually a mix of both.

The second option is that the VCT can continue to invest in a business if its manager believes it has potential to sustain its levels of growth. In this way, a VCT can also receive the benefits of getting in at the early stages with companies that eventually become household names. Octopus Titan VCT is one of the best examples of this, with its success stories including Zoopla, Graze and SwiftKey..

Current investment opportunities

Although at this time of year there are not a huge number of VCTs open (most raise money towards the tail end of the tax year), Chelsea clients can currently access these two opportunities.

Downing FOUR VCT
This is one VCT, separated into two distinct parts: generalist and healthcare. Although this VCT is new, Downing has a very strong track record with other VCTs. The healthcare specialist portion is unique and allows investors to choose to have exposure to that sector. We also like that they offer a monthly investment option for as little as £500/month.

VCT Type of VCT Minimum Subscription Initial Charge Before Discount Discount Application Forms Closing Date
Downing FOUR VCT Generalist & Healthcare £5,000 or £500/month 4% 2.25%

Brochure
Application form

30/09/2017

Pembroke VCT

A VCT that is relatively new but already has a good track record, with returns of 10.5%^ since March 2015. In spite of its young age, Pembroke has already started paying tax-free dividends to investors. Pembroke VCT is managed by Oakley Capital, who have been managing money since 2002. The VCT is generalist and invests into all sectors, and currently has a high weighting in hospitality. We like that Pembroke has the lowest total expense ratio (TER) out of all VCT companies.

VCT Type of VCT Minimum Subscription Initial Charge Before Discount Discount Application Forms Closing Date
Pembroke VCT Generalist £3,000 5% 3% Brochure & Application form 30/06/2017

^Pembroke unaudited figures

Foresight VCT 4

Following the merger of Foresight 3 VCT into Foresight 4 VCT, a top-up offer of £50m, with a further £50m over-allotment facility, has just been launched. Foresight Four is a generalist VCT but has a higher asset weighting in technology companies.

VCT Type of VCT Minimum Subscription Initial Charge Before Discount Discount Application Forms Closing Date
Foresight VCT Generalist £3,000 5.5% 5% until 31/07/2017;
3% until 30/11/2017;
2% thereafter**
Brochure & Application form 30/06/2017

**NB: Existing investors get a slightly higher discount: 5.5% until 31/07/2017; 3.5% until 30/11/2017; 2.5% thereafter

The risks of VCTs

VCTs invest into very high-risk, smaller companies, which may fail. They are also very illiquid and you may have to hold them for longer than the minimum five-year investment period. There is no guarantee you will get back less than your original investment.

*As long as the investor has paid relevant income tax. These shares must be held for at least five years, or this 30% must be paid back.

Important notice
Please be aware that VCTs are long-term investments. VCTs usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. In addition, the level of charges are often greater than unit trusts and OEICs. Past performance is not necessarily a guide to the future. The value of investments, and the income from them, can fall as well as rise, due to market and currency fluctuations and you may not get back the amount originally invested. All our featured products should be regarded as medium to long-term investments. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Published on 24/05/2017