More than four-fifths of investors in VCTs (81%) feel the pandemic has made supporting smaller UK businesses more important1 according to new research from the Association of Investment Companies (AIC) conducted by Research in Finance.2
The AIC’s survey offers new insight into private investors’ motivations for using VCTs (venture capital trusts).
Almost nine in ten respondents (88%) said it was important to them that VCTs help support the UK economy3 and more than four-fifths (84%) believe that by using VCTs they’re helping UK entrepreneurs.4
81% of VCT investors feel that by using VCTs they’re supporting cutting-edge science such as healthcare and technology innovations.5 74% invest in VCTs for the growth potential of backing young companies early and two thirds (67%) appreciate they can support green technologies by using VCTs.6
In addition to supporting smaller UK businesses, more than half of VCT investors (54%) believe the pandemic has made ESG considerations more important.7
The goal of most VCT investors is saving for retirement (56%), whilst 44% use them for saving for their families. The AIC’s survey found that more than four-fifths of VCT investors (84%) are satisfied with their experience of VCTs and just over three-quarters (76%) would recommend VCTs to other investors.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “VCTs can play a vital role in helping us build back better. They bridge the funding gap for small, growing companies and offer support and expertise to businesses in diverse areas, from machine learning to green technology. It’s clear that VCT investors value the opportunity to support UK entrepreneurs and stimulate innovation, alongside the range of tax benefits that VCTs offer.
“This research shows most investors think the pandemic has made supporting smaller companies in the UK more important than before. VCTs allow investors to assist young companies while meeting their own investment goals, like saving for retirement or their family. It’s good to see that the majority of investors are satisfied with their investments in VCTs. However, it’s important investors are aware that VCTs are high risk. If anyone is in doubt whether VCTs are suitable for them, they should speak to a financial adviser with experience in this area.”
Benefits of VCTs
Investors identified several benefits to VCTs over other forms of tax-efficient investment. These included the diversification offered by VCT portfolios, the ability to invest smaller sums, tax-free dividends and VCTs’ corporate structure, with a board of directors.
More than half of VCT investors (60%) do not use the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), or AIM Inheritance Tax portfolios.
Choosing a VCT
When researching a VCT to invest in, the factors which influence most investors’ decisions are the management company’s reputation (76%), past investment performance (66%) and the type of innovation the VCT supports, such as clean energy or medical technologies (58%).
Most investors use VCTs for tax relief (88%). Of this group, 63% think the upfront income tax relief is VCTs’ most important tax benefit, followed by tax-free dividends (19%) and tax-exempt capital gains (18%).
However, whilst tax relief is the primary reason for investing in VCTs for 72% of private investors, for the remaining 28% other reasons are more important. These include the growth potential of backing young companies early and the feeling that they are supporting UK entrepreneurs.
Most investors reinvest tax-free dividends they receive from VCTs in other types of investment (56%), while others reinvest them in more VCT shares (19%) or spend them (17%).
Investors who spend their VCT income report spending it on holidays, home improvements and general living expenses, as well as giving it to their children.
The AIC’s survey found that one third of VCT investors (33%) have been investing in VCTs for less than three years, a further 30% for three to five years, and the remaining 37% for more than five years.
More than a third of VCT investors (35%) have no more than £10,000 invested in VCTs, while a further 37% have between £10,000 and £50,000.
Individuals may invest up to £200,000 in VCTs per year. However, the majority (58%) invest less than a tenth of that amount, up to £20,000.