Why invest in a Venture Capital Trust?

There are now over 4.2 million people in the UK paying tax at the higher rates of income tax, but options for mitigating income tax liabilities have also narrowed in recent years with both greater restrictions on the amounts that can be contributed annually into pensions as well as the value of assets that can be accumulated in them over a lifetime. In particular, the introduction of a tapered annual pension allowance for those with total incomes of over £150,000 per year has significantly curtailed access to pension tax reliefs for higher earners. Unsurprisingly then, those impacted by these developments have been increasingly prepared to explore alternative, tax efficient schemes, such as VCTs, which have full statutory backing as a state aided scheme designed to attract private finance for fledgling UK companies.

How do VCTs work?

VCTs offer private investors a cocktail of incentives including 30% income tax relief on subscriptions to new share issues (repayable if the shares are sold within five years) as well as tax free dividends and gains. These are provided for a reason: investment in small, illiquid, unquoted or AIM listed companies carries considerable risk. VCTs help mitigate this through a combination of professional management, diversification and the cushion of the income tax reliefs but it is of course vital to select VCTs carefully, especially given changes to the VCT investment rules in the November 2015 and 2017 Budgets. These changes have refocused VCTs on making new investments into companies than are typically less than seven years old and there have also been new risk tests introduced, to prevent VCTs from structuring deals designed to maximise capital preservation while allowing investor to achieve the tax benefits. These changes have required even some of the most well-established VCT management groups to make considerable changes to their investment processes and also to recruit new professionals into their teams. Over time the profile of VCT portfolios will also evolve as exposure to younger companies increases and this is like to make returns, including dividends, more erratic than in the past.

VCT new share issues are always limited in size and shares are typically allocated on a first come, first served basis. We expected up to £800 million of capacity to be sought in the 2018/19 tax year, through around 20 fund raisings, some of which aggregate multiple VCTs managed by the same groups.

Top 10 VCTs to invest in for 2019

The offers that we believe merit strong consideration include the latest fund raisings from:

  •  Octopus Titan;
  • British Smaller Companies VCT;
  • British Smaller Companies VCT 2;
  • Hargreave Hale AIM VCT;
  • Albion Six VCTs

Octopus Titan

Octopus Titan is the largest VCT of all and a voracious fund raiser. Unlike most other VCTs, it has always focused on earlier-stage companies and has therefore be well positioned to cope with recent rules changes. Titan typically backs technology-enabled companies before they have achieved profitability, providing successive rounds of follow-on finance to those that meet expected milestones, while letting the disappointments fall by the wayside.

British Smaller Companies VCT

The two British Smaller Companies VCTs, both of which are managed by YFM Private Equity, have not undertaken significant new fund raising since 2015/16 and we expect demand for this offer will be strong. These VCTs offer access to a diversified portfolio of mature companies, with 70% of the combined portfolio having been backed when the VCT rules were less rigid. New deals however are going into young, growth companies such as EIKON, a cutting-edge provider of post-production services to the movie industry, which has recently expanded into Los Angeles on the back of VCT financing.

Hargreave Hale AIM VCT

Hargreave Hale AIM VCT is predominantly focused on AIM companies but new deals have increasingly backed private businesses as well. This is one of the most diversified portfolios available, with over 75 AIM companies and 8 private businesses, include Gousto, a tech-savvy meal box-delivery business and Honest Brew an online platform for the distribution of craft beer from small breweries. NAV yield at 30/9/18 – 4.57%.

Albion VCTs

The six Albion VCTs (Albion Venture Capital Trust, Albion Technology & General VCT, Albion Development VCT, Crown Place VCT, Albion Enterprise VCT and Kings Arms Yard VCT), when owned in aggregate, provide the scope for the receipt of monthly dividends with their existing, legacy portfolios providing a combination of exposure to defensive, often asset backed investments and high growth technology businesses. New deals will focus on the latter.

Jason Hollands is managing director, business development and communications at Tilney Investment Management Services Ltd