Home Business News You’ve done your ISA, now here’s a VCT portfolio to consider

You’ve done your ISA, now here’s a VCT portfolio to consider

12th Mar 24 12:35 pm

Investing in an ISA is an annual ritual for many investors.

But if you’re in the fortunate position of maxing out your ISA allowance, or you have a particularly large tax bill this year, you might be considering a Venture Capital Trust (VCT).

Why consider VCTs?

VCTs are a type of investment trust that invests exclusively in small, fast growing UK companies. Last year almost half of VCT investee companies grew sales by more than 25% year-on-year, far faster than the UK’s main market of listed companies.

To encourage investment in these fast growing, but high risk companies, the government offers VCT investors generous tax reliefs – including 30% income tax relief up front and tax free dividends. In a world where the tax burden on wealthier individuals is increasing all the time, that is potentially very appealing.

Who should consider VCTs?

Investing in small companies is higher risk, and on top of that VCT rules mean investors have to remain invested for at least five years if they want to qualify for tax relief.

The combination of higher risk and longer investment horizons means VCTs tend to be more popular among more experienced investors who already have a conventional investment portfolio. They are able to take the increased risk and able to tie money up for an extended period. They’re also more likely to have a sizeable income tax bill to offset – so benefit most from a VCT’s tax saving side effects.

A beginners portfolio for VCTs?

As with any investment, diversification is key when investing in smaller companies – and while all VCTs invest in a portfolio of different companies, backing a selection of different VCT managers can help to diversify investors across a range of underlying markets.

The below is an example of the kind of portfolio a first time VCT investor could build – based on a £35,000 overall investment (the average annual VCT investment among Wealth Club clients). It would spread their money across around 200 small British businesses – including both private companies and those listed on AIM.

A £35,000 VCT portfolio

  • Octopus Apollo  – £10,000
  • Baronsmead VCTs – £10,000
  • Pembroke VCT – £10,000
  • Foresight Technology VCT – £5,000

Nicholas Hyett, Investment Manager at Wealth Club, said, “When investing in small companies, diversity is key. Small companies are more likely to fail than larger ones, and having all your eggs in one basket increases the risk of significant financial losses. By diversifying your investment you not only reduce that risk, but also increase the chance you hit a winner. And often in venture capital just one or two investments will end up delivering the vast majority of overall returns. Picking just four VCTs can give you an underlying portfolio of hundred of companies.

By spreading your investment across multiple VCTs, you diversify the type of companies you back too – since different VCT managers tend to have expertise in different sectors.

For example, the manger of Pembroke VCT has particular expertise in more consumer exposed investments, whereas Octopus Apollo focuses on more established B2B software businesses, and Baronsmead VCT includes a portfolio of listed companies. The smaller Foresight Technology VCT is newer to the market, and specialises in deep-tech investments that generally take a longer time to pay off.

A £35,000 investment could entitle investors to up to £10,500 of income tax relief upfront, as well as tax free dividends. However, it’s worth bearing in mind that VCT fundraises have limited capacity, and once they’re full, they’re full. Popular fundraises can, and do, fill quickly, particularly as we approach the tax year end.”

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