UK investors poured more than £1bn into venture capital trusts in the tax year just ended, in a record fundraising season for the early-stage businesses investment vehicles.
Figures published by the Association of Investment Companies (AIC) show that a record £1.13bn was invested in venture capital trusts in 2021-22, a 65 per cent increase compared with the previous tax year.
The boost comes as investors seek to shelter their investments and income from tax by investing in VCTs, a structure that provides tax breaks in exchange for backing relatively risky early-stage UK companies.
“VCTs have finally edged into the mainstream,” said Alex Davies, chief executive and founder of Wealth Club. This year’s fundraising exceeds the previous record of £779mn set in the 2005-06 tax year.
Jason Hollands, managing director at platform Bestinvest, said demand for VCTs had increased because of greater limits on pensions tax relief for high earners and a crackdown on various tax loopholes. An FT survey found that being “capped out” of pensions savings was a major driver of the boom in VCTs investing.
However, VCTs drawing cash from a wider pool of investors has sparked concern from some analysts that the desire to minimise tax may be leading savers to take on undue risks by putting money into very young companies.
Venture capital trusts are “one of the few tax efficient options available” for investors already maximising their pensions and individual savings accounts (Isas), says Hollands.
New share issues from VCTs come with a 30 per cent income tax credit if the stock is held for at least five years, while dividends and gains are tax-free. However, Hollands said trusts are not suitable for everyone because they invest in “illiquid, fledgling companies”.
The dividend tax increase, announced last October which came into force this month, may have also given the VCT sector a boost.
Venture capital trusts typically invest in young, privately owned companies with assets of £15mn or less, and fewer than 250 employees.
“After the past two tough years, investors are particularly interested in VCTs which support entrepreneurs and help build back the economy,” said Richard Stone, chief executive of the AIC, an industry group for investment companies.
According to research conducted by the AIC, 88 per cent of investors use venture capital trusts for tax relief, with almost two-thirds of them saying the upfront income tax relief was its most important tax benefit.
The same research also found that most investors in VCTs said it was important to them that they supported the UK economy. Octopus Titan, which has backed the likes of Depop, Cazoo and Zoopla, raised the most money this year, with investors pouring £200mn into its portfolio of more than 90 start-ups.
But the money raised by VCTs in the last year will not all fund new ventures, said Hollands. Last year’s fundraising boom was “driven to a considerable degree” by young companies’ need for cash after being hit during the pandemic. “Unlike more mature businesses, fast-growing companies can have a voracious appetite for cash on their journey to profitability . . . we can expect VCTs to come back for more fundraising on a regular basis, to support such businesses,” he added.