It looks like this will prove to be a record-breaking year for Venture Capital Trusts (VCTs), which are currently raising funds at their fastest rate in 15 years. According to broker Wealth Club, VCTs are well on track to surpass the industry’s previous fundraising record of £779m set in 2006. Inflows have been helped by the increase in dividend taxes announced by the UK Government over the summer.
But changes to tax legislation only tell part of the story – growing numbers of investors are using VCTs to invest in innovative British companies because of their long-term growth potential. Many of these companies have demonstrated their resilience during a period of continued uncertainty and business disruption caused by the coronavirus pandemic. The predicted increase in inflows suggests investors recognise the value in supporting the type of innovative healthcare, technology and science-focused businesses that have been so crucial in helping us all to adapt to the challenges presented by the ‘new normal’.
A Reminder of VCT Tax Benefits
Of course, VCTs offer a range of tax benefits to offset the risk of investing in early-stage firms, such as 30% income tax relief (provided the VCT shares are held for at least five years), tax-free capital gains when the VCT shares are sold, and tax-free dividends. These tax benefits are available on investments of up to £200,000 in a tax year.
This means VCTs are often considered suitable for investors seeking a consistent level of income. As VCTs qualify for tax-free dividends, VCT investors should be unaffected if the Government goes ahead with proposed dividend tax increases from April 2022. This means VCT investors can potentially enjoy a significant saving on their tax bill and get more from their returns, all while helping outstanding UK businesses grow.
VCTs are also widely used today for retirement planning. While they are not likely to ever be considered as a pension replacement, they can certainly help those who have reached the limits on their annual pension contributions (£40,000) or the lifetime pension contribution allowance (£1,073,100), after which any further contributions are taxed. Investing in a VCT alongside a pension is therefore an effective route for people to achieve a tax-efficient supplementary income stream – both before and after retirement.
Not All VCTs Are Created Equal
While investors are often drawn to VCTs because of the tax benefits, it’s important to recognise that a VCT is only as good as the companies it chooses to invest in. At Blackfinch, our investment team looks to invest in companies working towards a more sustainable future, and that share our commitment to environmental, social and governance (ESG) principles. Our expert team digs deep to discover innovative new tech firms – in dynamic areas such as educational technology, artificial intelligence, and software-as-a-service – that can grow in value while changing the world for the better.
Experienced Team Adding Value from Within
Our support for portfolio companies is about much more than money – we go the extra mile to help them achieve their growth potential. We’ve developed a network of experienced founders, industry leaders and technology experts to make up our team of ‘Venture Partners’, who we appoint as non-executive directors to the boards of the companies they can best serve. The extensive experience, expertise and contacts available through the Venture Partners adds meaningful value, opens doors and helps support portfolio companies to scale up organically.
Diversified Portfolios Stand the Best Chance of Success
Investing in any start-up or VCT-qualifying smaller company is high risk. That’s why at Blackfinch we spread our investments across several companies operating in different tech-based sectors. Rather than relying on one or two firms to reap rewards, the chances of overall success are much greater this way. We invest with purpose, and we only choose to support those companies where we believe we can exit at a higher valuation, and deliver strong returns (within reasonable timeframes) to our investors.
Increased Dividends Potential
Some people think VCTs only focus on supporting very early-stage businesses at the beginning of their lifecycle. However, at Blackfinch we believe VCT funding should be focused on companies that can show they are already generating revenues and have already started building their customer base. This means we are confident of paying out dividends to our investors. From 2024, the Blackfinch Spring VCT will be targeting dividends of 5% per year to investors, and special dividends may also be paid out for early exits. Of course, should you choose to reinvest your dividends, you are eligible to claim a further 30% income tax relief on the amount reinvested.
Blackfinch Spring VCT – now open
VCTs might be enjoying a record-breaking season, but if you haven’t made a VCT investment yet this year, don’t worry – there’s still time get involved. Send us your Blackfinch Spring VCT application before 5pm on 27 January 2022 you’ll receive a 1.5% discount on fees. If you leave it until after this date, you can still claim a 1% discount on fees provided you invest before 10am on 4 April 2022.
Capital at risk.
Visit blackfinch.ventures/vct for more information about the Blackfinch Spring VCT. The Blackfinch Spring VCT may not be suitable for all investors. We recommend prospective investors seek independent advice before making an investment decision.