As personal investors increasing look to diversify portfolios and seek better returns, growth businesses are set to benefit from better access to capital.
Research conducted by venture capital firm Albion Ventures finds that more than one in six people investing in a venture capital trust (VCT) this tax year will be doing so for the first time.
VCTs are listings on the stock market which look to make returns by investing in other companies, usually those which are at an early growth stage and need capital to develop. Normally, any profit paid on to VCT investors, based on returns from ‘higher risk’ investments, are done so as a tax-free lump sum – with the original capital reinvested into the next VCT.
Alongside other tax-efficient investment routes such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, VCTs offer a way for high-risk and early-stage businesses to access capital.
Clients, advisers say, are backing VCTs due to the tax free dividends (20 per cent of respondents), because ISA contributions have been maximised (20 per cent) and new limits to pensions meaning that that total amount savers can keep in a pension pot have dropped from 1.5 million to 1.25 million (16 per cent).
Albion’s research also finds that some 31 per cent of financial advisers are forecasting increased levels of interest from clients in VCTs. Only 3 per cent predict a fall in interest.
Back in October, the Association of Investment Companies (AIC) disclosed that the mount of funds under management in VCTs had reached an all-time high. The£2.86 billion held represented the healthiest total since the investment process was set up in 1995.
More on VCTs:
- The role of VCT finance
- VCTs: the good, the bad and the ugly
- EIS and VCT marketing restrictions escape chop of FCA
The news of more first-time investors comes after George Osborne’s Autumn Statement outlined that investments linked to a VCT share buy-back, or those that have been made within six months of a disposal of shares in the same VCT, will not qualify for tax relief. Investors will now not be able to access upfront income tax relief by re-subscribing for shares in a ‘maturing’ VCT sold back to a provider.
Patrick Reeve, managing partner at Albion Ventures, says that the firm is itself seeing interest from an increasingly wide range of potential investors such as young professionals.
‘The findings also suggest that advisers have become more familiar with VCTs, possibly as a result of the RDR [retail distribution review], and as a result feel confident recombining them to suitable clients,’ he adds.
‘Ultimately it’s been a combination of low returns on savings products and the reduction in the pension lifetime allowance that have acted as a catalyst for VCTs.’