Why Venture Capital Trusts (VCTs) Are Growing Popular Post-Budget

Rachel Reeve’s 2024 Autumn Budget unveiled a complete reform of the Capital Gains Tax (CGT) system, which has meant that both investors and entrepreneurs disposing of shares will have to pay higher taxes. Venture Capital Trusts, or VCTs, are investment vehicles that have been excluded from these changes, retaining their current tax structure until 2035.

Because VCTs are publicly listed, they are a viable investment option for private investors, traditional VCs and savers alike, their investment activity is subject to some requirements that regulate which companies VCTs can invest in, as well as how long investors should hold on to their VCT shares.

As they retained their tax efficiency amid Reeve’s CGT crackdown, VCTs have become an increasingly attractive vehicle for UK investors, with a number of trusts raising funds in the past few weeks.

What are Venture Capital Trusts (VCTs)?

Venture Capital Trusts are publicly listed companies designed to provide funding to smaller, high-risk companies in exchange for equity. These trusts pool funds from investors and allocate them to early-stage businesses, particularly those with growth potential in innovative sectors like technology, BioTech and renewable energy.

VCTs not only support the UK’s startup ecosystem but also offer attractive tax benefits to investors, including income tax relief, tax-free dividends, and exemption from Capital Gains Tax.

Why Are VCTs More Tax Efficient?

One of the main draws of VCTs is the tax regime they are subject to. Investors can claim up to 30% income tax relief on investments of up to £200,000 per tax year, provided they hold their shares for at least five years. Additionally, dividends are tax-free, and any capital gains realised upon selling VCT shares are exempt from CGT.

The 2024 Budget reaffirmed the government’s commitment to supporting VCTs by maintaining these tax benefits, despite widespread speculation of potential reductions. As tax hikes loom in other areas, VCTs have become an attractive option for high-net-worth individuals seeking to optimise their tax planning.

Which Trusts Have Raised Funds After the Budget?

Before and after the highly anticipated budget announcement, many VCTs have announced hefty fundraises, offering the opportunity to benefit from their special CGT status, and capitalising on the changing tax policies to attract investors who would normally use other vehicles.

Here is a detailed list of VCTs that have launched fundraises in the past couple of months:

1. ProVen VCTs
   Managed by Beringea, announced a £40 million fundraise. The funds will target investments in sectors like digital technology, consumer services, and healthcare. This effort reflects Beringea’s focus on high-growth businesses that leverage innovation to disrupt established markets.
2. Octopus Investments
   Launched a £35m fundraising for its Octopus Apollo VCT, focusing on smaller B2B software companies. Prime targets for this VCT, according to Octopus Investments, tend to be somewhat established, “having already brought their product or service to market, with existing recurring revenues and the potential for significant expansion.”
3. YFM Equity Partners
   At the end of last month, the British Smaller Companies VCTs have announced an offer for up to £75m. With total net assets of £415m across a portfolio of 42 companies, the trusts focus on technology companies with a bias towards data, tech-enabled services and new media.
4. Mobeus VCTs
   Back in September, when rumours of Reeve’s plans were already quite consolidated, Mobeus raised £90m for their Income & Growth VCTs. These are quite popular, generalist VCTs, investing in a “diverse portfolio of UK unquoted companies”.

VCTs raise funds periodically, and often towards the end of the year, but in all instances above their tax efficiency being preserved post-Budget was quoted as one of the key opportunities to raise funds at this time in particular, giving investors a preferential route to keep their CGT privileges.

What Companies Can Benefit From This?

Aside from the sectors set out in the scope of the fundraisings listed above, any high-growth, early stage private company that would normally raise funds through VCs can be an investment target for a VCT.

Eligibility criteria follow the same rules as EIS: qualifying trade, gross assets under £15m, headcount under 250, and age under 7 years old. The amount invested must be under £5m per funding round to remain tax-efficient. The only difference is that VCT investors must keep their shares for 5 years to qualify for CGT exemption, unlike EIS which only requires 3 years.

With Venture Capital Trusts experiencing a renaissance post-budget, the reaffirmed tax benefits, coupled with heightened fundraising activity, make VCTs an attractive proposition for both investors and early-stage businesses. As the landscape evolves, these Trusts are poised to play a pivotal role in fostering innovation and driving economic growth in the UK.