Venture capital trusts (VCTs) raised £1.1bn in the most recent tax year from April 2021 to 2022, data from HM Revenue & Customs (HMRC) has shown, a 68% increase from the previous year, as investors increasingly turned to venture capital to take advantage of the tax benefits it provides.
The amount of funds raised by VCTs has been on a rising trend in recent years despite the number of funds available to investors falling. Last year there were five fewer than the year before, with 52 in total.
The amount of cash put into these vehicles on an annual basis is now more than double the level a decade ago in the financial year 2009 to 2010, as the table below shows.
Amount of funds raised and number of Venture Capital Trusts (VCTs) by year, 1995-96 to 2021-22
Source: HMRC
But not only is more money flowing into the asset class – the number of investors and the amount they claimed as tax relief is going up as well.
Dividends or capital growth on VCT investments are tax-free for investors, who can also claim 30% income tax relief on the amount invested up to £200,000. In the most recent financial year the amount claimed in tax relief went up by 10%, with investors using the relief on £640m worth of savings.
The substantial increase of the past financial year was attributed in part to the recovery from the Covid-19 pandemic and to the fact that the VCT market broadly follows the wider venture capital market.
The attractiveness of these vehicles has historically risen when fiscal measures have been introduced. For example, the increase in the income tax relief rate to 40% caused a sharp increase in funds raised between 2004 and 2006, while the spike in 2017-2018 and 2018-2019 has been linked to the reduction of the pension lifetime allowance from £1.25m to £1m, according to HMRC.
Tom O’Brien, financial planner at RBC Brewin Dolphin, explained the increase in the use of these schemes as a result of the annual contributions to pensions being capped for higher earners, meaning VCTs offer a great way for them to receive 30% income tax relief.
“There is a great saying that if you do a VCT each year for five years, then you have done your income tax planning for life,” he said.
“With the reduction of the additional tax rate bands coming into effect, we would expect the use of planning methods like VCTs to continue to grow in the years ahead.”
That said, while they can be an attractive investment opportunity, they are only suitable for those who are willing to accept the associated risks, the financial planner warned.
“The sector offers a very broad and diverse range of opportunities, but they are high-risk investments and should only be considered as part of a multi-asset, long-term investment portfolio.”