The last tax year was another astonishing one for Venture Capital Trusts (VCTs), which are currently raising funds at their fastest rate in decades. According to the Association of Investment Companies (AIC) fundraising over the last three tax years (2021/22, 2022/23 and 2023/24) totals over £3 billion.
This includes the record year of 2021/2022 when funds in excess of £1.13bn were raised. The figures confirm that VCTs are a widely accepted form of annual tax planning for investors who recognise the benefit of investing in ambitious and growing companies, while also claiming valuable tax incentives.
A Reminder of VCT Tax Benefits
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.
But the tax breaks available with VCTs 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 sustained increase in inflows suggests investors recognise the value in supporting the type of innovative healthcare, technology and science-focused businesses that have become the ‘new normal’.
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 better future, and that share our commitment to responsible investing 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 many 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 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, in turn boosting total returns. The Blackfinch Spring VCT targets dividends of 5% per year to investors. As a newer VCT there is also the possibility of special dividends from 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.
