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What Is A Venture Capital Trust (VCT)?
A Venture Capital Trust (VCT) is a category of investment trust that raises funds to provide financial support to small, high-risk firms with high potential for growth. These funds secure venture capital for smaller, expanding, high-growth companies. Experienced investors are willing to invest in VCTs for significant tax-efficient returns.
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VCT is a term widely used in the United Kingdom. However, a company must be listed on recognized security exchanges in the UK to draw funds from markets to fund budding and innovative firms around. Moreover, VCTs are highly risky avenues of investment, and investors stand to lose their investments as early-stage firms that do not have a proven record of accomplishment or a financial base.
Key Takeaways
- A venture capital trust (VCT) is an investment trust that provides funds for start-ups, high-risk small businesses, and businesses with significant growth potential.
- It must be listed on a significant exchange in the UK. Companies subject to raising funds through VCTS must have only up to 250 employees and gross assets worth £15 million before the investment.
- Skilled investors can invest in such VCTs to earn tax-efficient returns, income tax relief of up to 30% on existing invested funds, plus capital gains tax exemption on profits made.
- Based on theme and lifespan, VCTs are divided into generalist, specialist, AIM, evergreen, and limited-life VCTs.
Venture Capital Trust Explained
Venture Capital Trust (VCT) is a tax-efficient investment vehicle in which individual or institutional investors tend to provide capital to high-risk businesses in the United Kingdom with higher growth potential. These closed-end investment funds, once listed on a popular exchange, take the form of publicly traded private equity funds. Investors can choose to buy any specific fund unit directly as a primary issue or from the London Stock Exchange through the secondary markets.
VCTs came into existence in the UK in 1995 with the aim of boosting investments in local business ventures, which might not be able to perform to the expected extent if not supported financially. AIM funds, evergreen and limited life comprised these funds.
Furthermore, an investment vehicle can become a VCT only if the following criteria are met. Let us check the applicable venture capital trust rules below.
- It should be listed on any big exchange in the UK.
- Firms subject to receiving funds from VCTs should have only up to 250 employees.
- The firms qualifying for VCTs must have gross assets worth £15 million or less before the investment.
Types
Venture Capital Trusts are divided into various groups based on themes and periods. Let us check out the categories in which these VCTs exist:
Theme-based VCTs:
- Generalist VCTs – These trusts invest in a wide variety of unlisted firms across various sectors and industries.
- Specialist VCTs – These investment trusts emphasize investing in certain sectors and industries.
- AIM VCTs—These trusts can take a generalist or specialist approach to investing in firms listed on the AIM exchange, a sub-market of the London Stock Exchange.
Period-based VCTs:
- Evergreen VCTs – As the name suggests, these trusts are evergreen and have infinite lifespans.
- Limited Life VCTs—These are options that close as soon as the VCT's minimum holding period ends. The minimum holding period is five years, after which the VCT distributes the proceeds among shareholders. In short, these options generate income only for a few years.
Though investments in these trusts involve many risks, appropriate portfolio diversification can help investors mitigate those risks and increase their profits.
Examples
Let us look at some examples to understand the topic better:
Example #1
Suppose Sophia and Mark learn about a VCT withholding period of five years and, hence, research more to discover the benefits of investing in it. Mark, who has always dreamt of helping budding ventures flourish just the way he did from scratch, finds it to be a great way of supporting someone to make it big in the market through his finances. Hence, he finds the venture capital trust shares on the LSE and invests in them.
On the other hand, Sophia finds the option attractive as she would get tax benefits on investing in the shares. Hence, she does it for tax advantages and dividends. As soon as a pool of investors invests in the trust, it uses the funds to help the business ventures grow. After the end of the five-year holding period, the VCT distributes the assets and proceeds back to investors.
Example #2
In September 2024, UK's leading equity investor Mobeus launched share offers worth £90 million for its two popular VCTs—Mobeus Income & Growth VCT and The Income & Growth VCT. Both these investment vehicles have been popular among investors since they opened in October 2022, and their worth has made their return market yet another great season of VCTs.
These VCTs consist of portfolios of around 50 companies, ranging from budding firms with no revenue generation at all to ventures that are doing really well. In the last five years, these two investment vehicles have generated 71.2% of the total return on their underlying security, thereby aiming for a better dividend target.
Tax Relief
The major tax relief for investors comes in the form of income tax benefits. The government offers these venture capital trust tax reliefs to attract large-scale investments in early-stage businesses in the UK.
- Upfront tax relief of up to 30%
- Venture capital trust dividends received remain exempted from income tax.
- All capital gains remain exempted from tax on disposal of shares.
Nevertheless, the above tax benefits only apply when investors have held the VCT shares for at least five years.
Frequently Asked Questions (FAQs)
How do you invest in venture capital trusts?
Are venture capital trust dividends taxable?
Are venture capital trusts regulated?
Are venture capital trust investment schemes risky?
