The tax burden is at its highest since 1949, increasingly weighing on higher earners. And it’s about to get worse. Come 6th April, more people will be dragged into the higher and top rates of tax, whilst those already caught will see their tax bills rise. As a result, more and more investors are turning to tax-efficient investment schemes, such as Venture Capital Trusts (VCTs), resulting in over £2bn of inflows last tax-year.
When you invest in VCTs, you get up to 30% income tax relief plus tax-free dividends – this could be particularly valuable once the tax-free allowance for dividends is halved. You can invest up to £200,000 a year.
VCT tax reliefs have so far survived unscathed the raft of tax-grabbing rules of the last few years – and it’s easy to see why. VCTs provide essential capital to dynamic young businesses – a driving force of the UK economy – the tax relief is a crucial incentive for private investors and a way to mitigate the risks involved.
Alex Davies, founder of Wealth Club said: “A recent survey of our clients revealed that over two-thirds of wealthy investors intend to invest more into tax efficient investments, such as Venture Capital Trusts (VCTs), as a result of the onerous new tax increases coming in from next month.
But it is not just about the tax relief. Investors are increasingly realising that growth and innovation are not likely to come from the large corporates you find on the main stock market, but rather from young, ambitious, and entrepreneurial start-ups. Not all will succeed but there’s now much more support compared to, say, 10 years ago – from incubators and accelerators to public and private funding – so they should have a better chance.
Moreover, over the ten years to December 2022 VCTs have performed well, with the 10 largest VCTs generating a NAV total return of 83%. And that is before taking into account tax relief, which enhances effective investor returns considerably.”
The two VCTs – Baronsmead Venture Trust and Baronsmead Second Venture Trust – have a history that goes back to 1995 and today are two of the largest and most diverse of all VCTs.
Together, they give investors exposure to a portfolio of over 85 companies: a mix of AIM-quoted and private companies, old-style management buyouts and newer early-stage growth investments. The manager, Gresham House, invests across different sectors, but prefers technology companies, especially those selling to businesses. An example is quality, risk, audit and compliance software company Ideagen, which generated a 13.5x return for the Baronsmead VCTs on exit.
The VCTs target an annual dividend yield of 7% of NAV – one of the most generous policies in the market – and have achieved this in each of the last five financial years.
The long-established British Smaller Companies VCTs have a loyal following amongst investors and an enviable track record of exits. When you invest, you get exposure to 35 companies, predominantly providing business services. The largest holding is business intelligence analytics platform Matillion. Now a global leader, Matillion became the sixth VCT-backed unicorn in September 2021 and was featured in the 2022 FT 1000: Europe’s Fastest Growing Companies. Another example is film and TV visual effects business Outpost, which was nominated for two Emmy Awards in 2022.
The VCTs don’t state a dividend target, but over the five years to 31 December 2022 paid total dividends per share of 38.5p (BSC) and 27.8p (BSC2).
With a portfolio of over 115 companies and net assets of £1.1 billion (December 2022), Octopus Titan VCT is the largest VCT and one of Europe’s largest venture capital funds.
Manager Octopus Ventures seeks “pioneers with global ambitions” whom it believes can achieve a 10x exit on the value of Titan’s initial investment. Indeed, over the years Octopus Titan has built a long track record of investing some of the UK’s fastest-growing technology companies, from Zoopla, the first $1 billion VCT-backed company, to fashion marketplace Depop and leading pet insurer Many Pets.
The VCT targets annual dividends of 5p per share; in the 10 years to December 2022, it has paid dividends of 91p per share.
* This is according to a survey of 1,300 high-net-worth investors who are members of Wealth Club. Conducted February 2023.