Venture Capital Trusts (VCTs) are traditionally purchased by high net worth individuals who are typically in a higher tax bracket. The reason being that VCTs are highly tax-efficient investments, giving the buyer the advantages of:
Over the years, the type of investor making use of VCT investments has changed. As a very simple rule of thumb, an investor would look at a VCT as a potential investment only after they had fully utilised their ISA and pension allowances for that tax year.
Whilst maximising other tax-efficient investments should still be seen as a good rule to follow, restrictions to the annual pension allowances has led those seeking tax-efficient ways to save to be drawn to VCTs earlier than they would have perhaps previously.
What puts VCTs high on the risk scale is that they invest into very small UK businesses, some of which may not yet be profit-making. Although investing into a VCT will increase the overall risk of the average investor's portfolio, it will give that investor exposure to small businesses which they may not otherwise be able to invest into by themselves.
Investors are also taking advantage of the vast knowledge which has been accumulated by the investment teams of the established VCT houses over the years, the knowledge which gives them a much greater chance of finding the 'diamond in the rough' company that has the best chance of giving a high level of return.
If you would like to find out more about VCTs and whether they could be right for you, you can read our useful guide here.