Published: Nov 14, 2018
Focus:
Insights
Launched in 1995, VCTs have always had loyal followers who have been attracted by the sector’s strong historic performance and its range of tax benefits, but in recent years, private investors are turning to VCTs in greater numbers. Steven Ford, Marketing Manager at Maven, looks at the five key reasons investors are being drawn towards VCTs; a once niche product which is now increasingly positioned as a mainstream investment option.
Cuts in pension allowance
Contributing to a pension has long been one of the most effective ways to reduce your liability to the highest rates of tax. However, changes to the lifetime allowance are making people look at new ways to complement their retirement planning. After hitting a peak of £1.8 million, the lifetime allowance has fallen significantly to £1.03 million. This reduction means that many more people are now at risk of exceeding the lifetime allowance and incurring a tax penalty. Recent figures show that the tax paid by individuals who have breached the lifetime allowance has soared by 1,000% since it was introduced in 2006.
Historically, once only an issue for high earners, the changes to the lifetime allowance now have a very real chance of making many middle-income savers fall foul of the rules, even when some are only making modest future pension contributions. This has led to more people looking at VCTs as a tax-efficient alternative when their pension pots are full.
It has now become easier to invest
Time is a precious commodity to most. One of the last things people want do in their spare time is personal administrative tasks. Luckily the days are gone when VCT investors could only subscribe for New Share Offers by filling in a paper application form, writing a cheque and then having to post them to the receiving agent. Maven’s development of the industry’s first online application and payment portal in 2017 was a game-changer, enabling investors to apply for new shares quickly, conveniently and from anywhere in the world.
Many investors are already seasoned users of digital personal banking, completing an array of online transactions through sites such as Amazon, and now expect an digital option as a given. Maven’s simple to use secure online application portal has provided investors with a convenient alternative to the traditional way of applying to new share offers, which tends to be cumbersome and slow. This innovative online solution has already benefitted many of our shareholders who are increasingly adopting this fast, easy method of investing, and in the process saving themselves a lot of time.
The chance to back the next £1 billion pound business
The carrot of the generous tax breaks is there for a reason; VCTs are inherently higher risk as they invest in earlier-stage businesses. Yet it is these businesses which are the engine room of the UK economy, and contributions by SMEs are forecast to hit new heights in 2020 according to the Centre for Economics and Business Research.
In the 20+ years since the Government launched VCTs the sector has consolidated considerably. The managers who struggled to deliver for investors have fallen by the wayside, whilst the remaining managers have built up a solid reputation, and proven their ability to invest in businesses with significant growth potential.
This ability to stock-pick and add value to dynamic smaller UK businesses has led to the point where industry has now seen its first VCT-backed £1 billion business. A few years ago many would have thought that impossible, but what it proves is that the entrepreneurial scene in the UK is thriving, and significant value can be found by VCT managers if a business addresses a clear market need or offers a market disruptive proposition.
Potential for a regular income stream
Demand for a sustainable income stream continues to sit as one of the top priorities for investors and VCTs appear to be meeting this demand. VCTs have steadily, and arguably under the radar, built up a reputation for generating a competitive and consistent dividend yield. According to the Association of Investment Companies (AIC) the average yield on a VCT is 7.44% (as at 13 November 2018). This is far higher than the average yields currently generated across the FTSE 100 or the FTSE All-Share.
Part of the reason for these impressive figures is that any money distributed by a VCT can be paid out as tax-free dividends. Maven Income and Growth VCT and Maven Income and Growth VCT 5 for example, which are currently raising funds through a new share issue, have established a track record of paying dividends, with both VCTs delivering consistent increases in NAV Total Return per Share in recent years (though please note that historical information should not be taken as any indication or forecast of future dividend levels).
Doing your bit to support British business
We should not underestimate the draw of supporting the next generation of UK businesses for many investors. VCTs are a fantastic way to do just that. They provide investors with the opportunity to help entrepreneurial small companies grow, and in return benefit from the success of those businesses if they perform well. In that respect it is a win win.
VCTs target an SME funding gap, providing finance to companies in a part of the market which is not well-served by traditional investors. Without this vital source of capital many would struggle to fulfil their true potential. Since 1995, VCTs have raised around £7 billion for investment into high growth UK businesses. This funding has helped fuel job creation, has enabled many to pursue an export strategy, and has transformed countless small companies.
As VCTs only support British businesses, it could be argued that investing through a VCT is the patriotic way to reduce a tax bill. Investors can feel confident that as part of their annual tax planning they are helping innovation thrive close to home and making their contribution to UK PLC.
