With tax increases coming in on 6 April, investors are looking at venture capital trusts (VCTs) as tax-efficient investment schemes given the generous tax allowance.
Come 6 April, the amount of capital investors can gain tax-free will be cut from £12,300 to £6,000 and dividend tax will be enforced starting from £1,000 gains, half of the current £2,000 a year.
VCTs are investment companies that are listed on the London Stock Exchange (LSEG.L) and set up to invest in small UK businesses that meet certain criteria.
To encourage support for these businesses, the government offers generous tax benefits for VCT investing. This also reflects the higher-risk nature of the companies they invest in.
As with any other investment, VCTs are not without risk, but investors get up to 30% income tax relief plus tax-free dividends on up to £200,000 a year when buying newly issued shares.
Alex Davies, founder of Wealth Club, said: “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.”
The asset class has proved popular, with more than £2bn inflows in the past tax year. Over the past decade, the 10 largest generated a net asset value total return of 83%.
Here are the three VCTs to invest in before the tax-year end according to Davies.
These two VCTs — Baronsmead Venture Trust and Baronsmead Second Venture Trust — have a history that goes back to 1995 and are two of the largest and most diverse VCTs.
Together, they give investors exposure to a portfolio of over 85 companies — a mix of AIM-quoted (^FTAI) 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 (net asset value) — one of the most generous policies in the market — and have achieved this in each of the last five financial years.
British Smaller Companies VCTs
The British Smaller Companies VCTs have a loyal following amongst investors and a 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).
Octopus Titan VCT
With a portfolio of over 115 companies and net assets of £1.1bn (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.
Octopus Titan has built a track record of investing some of the UK’s fastest-growing technology companies, from Zoopla, the first $1bn 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.