venture capital trusts – and are they worth investing in?

What are venture capital trusts – and are they worth investing in?

Venture capital trusts represent an exciting opportunity for investment for many people – especially if you’re willing to accept higher risks to reap bigger rewards.

In this blog post, we dive into the world of venture capital trusts (often referred to as VCTs), beginning by what they are and later exploring associated benefits and downsides.

What are venture capital trusts?

A venture capital trust (VCT) is a company listed on the London Stock Exchange. The company’s primary aim is to make money by investing in other companies and, ideally, reaping the rewards.

In a lot of ways, VCTs are similar to a standard investment trust. They’re a way for individuals to invest and hopefully grow their capital significantly, albeit at a higher risk than other investment funds.

Known as a closed-end fund, VCTs are typically listed on the London Stock Exchange and as such, their shares can be traded on the stock market.

While VCTs are high-risk investments, they’re an important part of the UK’s economic eco-system. That means that alongside high potential gains, they also boast significant tax advantages to entice prospective investors.

Who do venture capital trusts invest in?

First established in 1995, VCTs were designed to provide new opportunities to generate investment in local private businesses – particular those in need of financial backing to fulfil their predicted potential.

As such, VCTs focus on investing in promising young and upcoming companies, which they believe are likely to flourish financially. VCT managers will often provide advice and guidance to these young companies, to encourage success.

This is a distinctive feature of VCTs, whose investment managers specialise in identifying and investing in companies “at the ground floor”. But of course, even the experts can’t predict the future – while some of these new businesses will thrive (and richly reward their investors), many will fail.

Financial Conduct Authority weighs in on venture capital trusts

Before we go any further, it’s important to note that VCTs are not for everyone. The Financial Conduct Authority (FCA) is vocal about the level of caution individuals ought to take when considering investment. Here’s what they have to say:

• The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
• VCTs are considered a high-risk investment and are not suitable for the majority of retail investors.
• Tax reliefs are dependent on the VCT maintaining its qualifying status and on investors’ individual circumstances. Current tax rules are subject to change.

At HWIFM, advice and guidance are tailored to your exact financial circumstances and who you are as an individual.

We would never encourage you to invest in a VCT if your financial portfolio wasn’t suitable or if your risk profile was incompatible with the high-risk nature of VCTs.

What are the benefits to investing in venture capital trusts?

While VCTs can be more complicated to navigate than your standard investments, there’s certainly money to be made for individuals ready and able to take big risks.

Because VCTs seek out potential venture capital investments in small unlisted firms just starting out, there’s scope to generate higher-than-average, risk-adjusted returns.

These funds allow individual investors to tap into exciting, potentially high-yield venture capital investments via capital markets. While these kinds of investments are a bigger gamble, the rewards are higher than other investment trusts – with VCTs, it’s all to play for.

And just because VCTs invest in small companies, doesn’t mean you’ll miss out on dividends. Alongside capital growth, you’ll receive regular, tax-free dividends when you invest in a successful VCT.

Tax advantages to investing in venture capital trusts

VCTs help keep our economy ticking over by investing in new, emerging businesses. To try and off-set some of the risk that comes with investing in brand new businesses, VCTs provide investors with significant tax breaks.

When you invest in a VCT at point of launch, you can claim up to 30 per cent income tax relief on the amount you’ve just invested. This is provided you hold the investment for at least five years and the trust maintains its VCT status.

Most investors claim VCT income tax relief when they file their tax return. Depending on when you invest, this could mean a lower income tax bill or a refund if you’ve already paid the tax. You also don’t need to declare any tax-free dividends you receive from your investments.

The amount that you can invest in a VCT and claim tax relief on is capped at £200,000. You can invest more, but you won’t receive the tax breaks over this amount.

What are the risks involved in investing in venture capital trusts?

As we’ve mentioned throughout, investing in VCTs can be a risky business.

While the potential for gains is high, your investment is not only at the mercy of the fluctuating stock market – it’s also backing businesses that have yet to prove themselves lucrative. While these businesses may succeed and pay back their investors generously, there’s a chance that they won’t.

VCTs also tend to invest in a limited number of companies. A more focused portfolio, concentrated on a small number of investments, carries more risk – if one of their investments fail, there’s more pressure on the remaining companies to succeed.

As part of their smaller portfolios, VCTs tend to specialise in particular industries or sectors, e.g., funding care homes. This means that investments are at risk from both events that directly impact their chosen sector and general market fluctuations.

Should I invest in venture capital trusts?

Traditionally, VCTs tended to attract experienced investors with hefty investment portfolios. But that’s not necessarily the case today.

At HWIFM, we’re passionate about providing you with clear, impartial financial guidance based on your portfolio and appetite for investment. If you’re interested in higher yields at higher risk, a carefully chosen VCT could be well worth considering.

Whether you’re keen to invest in a VCT or you’d just like to find out more, our team of investment specialists are on hand to help you make a decision that feels right to you. Call 01606 338914 or email hello@hwifm.co.uk to speak to us today.