Published: Mar 23, 2016
Bill Nixon, Managing Partner at Maven
Last week's 2016 Budget served to remind us of the ongoing attraction of private equity focussed VCTs as a means to invest tax efficiently in an asset class which is generally uncorrelated to mainstream equity markets. Regardless of the merits of LISAs (Lifetime ISA) and ISAs, with the scope to invest in pensions having been squeezed so much in recent years, many investors continue to see VCTs as an important option to complement their conventional retirement planning.
There has been a steady erosion of the potential for tax efficient savings through pensions, as reductions in the annual and lifetime allowances have significantly reduced the ability of higher earners to build their pension pot ahead of retirement. In this environment, income focussed VCTs can offer investors access to an interesting asset class with an attractive combination of up front tax relief, and regular income paid tax free. VCTs are now firmly established on the UK investment landscape, and many VCT managers have delivered consistent returns to investors over a number of years.
Against this background it is unsurprising that this year's VCT offers have once again enjoyed strong investor demand, with a number having either closed or have already reached close to full subscription. With the end of the tax year now less than two weeks away, it appears likely that many of the most popular offers will be fully subscribed ahead of 5th April.
Since VCTs were first introduced in 1995, many of the leading managers in this specialist area of investment have generated attractive and consistent shareholder returns, on the back of a private equity focussed investment strategy. VCTs allow investors access to dynamic and growing UK smaller companies, sourced by experienced managers with the skills and experience to identify businesses that are on a growth trajectory, thereafter working closely with them to expand the business and grow shareholder value.
Ultimately, the objective is to successfully sell each investee company held by the VCT to generate positive shareholder returns, and help support a progressive dividend programme. Investing in a top-up offer from an existing VCT typically also allows investors to access an existing portfolio of investments, whilst at the same time enjoying generous tax breaks on amounts subscribed, including up to 30% initial tax relief and tax-free dividends.
Although the landscape of qualifying companies available to VCT managers has reduced as a consequence of the tightening of VCT investment criteria to align the UK with EU State Aid rules, the sector remains resilient, with many growth focussed and entrepreneurial companies in the UK suitable for VCT investment. With a track record of shareholder returns, allied to unrivalled tax incentives, it’s easy to understand why many investors continue to see VCTs as complementary to their pension and ISA savings. In January Maven launched a top up offer, for Maven Income and Growth VCT 6, which has already attracted almost £11m in subscriptions but will close when a total of £15m has been raised.
In summary, VCTs are well placed to remain an important tax-efficient investment option, offering unique access to an attractive asset class.