Venture Capital Trust Fundamentals and Investment

Venture capital trust funds are a type of investment vehicle that allows individuals to invest in startups and small businesses, providing them with the necessary funding to grow and expand.

Investors can invest in venture capital trusts (VCTs) with a minimum investment of £1,000 and a maximum of £200,000 per tax year.

VCTs offer tax benefits, including income tax relief on the investment and exemption from capital gains tax on the sale of shares.

Investors can also benefit from potential long-term capital growth and regular income through dividends.

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A Venture Capital Trust (VCT) is a tax-efficient investment vehicle that provides capital to small, growing businesses in the United Kingdom. It's a closed-end fund that was created by the U.K. government in the 1990s.

VCTs are specifically designed to help small businesses get off the ground, and they can hold these companies for many years, supporting their growth and adding new investments over time. This can lead to higher-than-average, risk-adjusted returns for investors.

The UK government introduced VCTs in 1995 to boost investment in new local businesses, and they've been listed on the London Stock Exchange ever since. VCTs are structured as closed-end investment funds, making them a form of publicly traded private equity funds.

Investors can purchase units of the fund directly in a primary issue or the secondary market via the London Stock Exchange. This makes it easier for individuals to access venture capital investments via capital markets.

Here's a brief overview of the benefits and risks of investing in a VCT:

Investing in a venture capital trust (VCT) can be a great way to support innovative businesses while potentially reducing your tax bill.

One of the main benefits of VCTs is the tax relief they offer. For investors who buy shares directly from the VCT in the primary market, they can claim 30% income tax relief on the principal investment amount of up to £200,000 in a given tax year.

This tax relief is conditional on holding the shares for five years. If you don't meet this condition, you won't be eligible for the relief.

Investors who buy shares in the secondary market don't qualify for this additional benefit, which is why shares purchased in this way often trade at a discount.

Here are the key tax benefits of VCTs:

Retail investors can purchase shares in venture capital trusts that are traded on major exchanges like the LSE.

The money from investors is pooled together and distributed to businesses to help them grow, all under the purview of fund managers who work for investment firms.

Fund managers work with investment firms to pool money from investors and distribute it to businesses.

Certain criteria must be met in order for a fund to be classified as a VCT, including listing on a major exchange in the U.K. and employing no more than 250 individuals.

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Companies under the VCT must have less than £15 million in gross assets before the investment and £16 million right after the investment.

Here are the main qualifications for a fund to be classified as a VCT:

VCTs have specific rules around how they invest their funds. They must raise funds through issues of new shares, and then have three years to invest this money.

Within this three-year timeframe, at least 80% of the VCT's assets must be invested in "qualifying" holdings. These are defined as holdings of shares or securities in unquoted companies or those traded on the Alternative Investment Market (AIM).

Qualifying holdings must have a permanent establishment in the UK and carry out a "qualifying trade". This is a key requirement for VCT investments.

Here are some specific details about what constitutes a qualifying holding:

VCTs have limits on how much they can invest in individual companies. Each investment cannot make up more than 15% of VCT assets, and the company into which the VCT invests must not exceed £15million in gross assets or have more than 250 employees.

Diversifying your portfolio is a smart move, and VCTs can be a great way to do it. They give you access to companies you may not otherwise hold.

Having a diversified portfolio is like having a well-stocked pantry - you're prepared for anything that comes your way. By investing in VCTs, you can spread your risk and increase your potential returns.

This is especially true if you're new to investing, as VCTs can help you get started with a solid foundation.

Volatility and liquidity can be a concern for investors, especially when it comes to VCT shares. They may be more prone to significant price fluctuations compared to other shares.

VCT shares can be harder to sell, which can make it difficult to quickly turn your investment into cash if needed. This is a key consideration for those who may require access to their funds in a hurry.

When choosing an investment, it's essential to consider the time horizon. Evergreen VCTs have an indefinite lifespan, meaning they can remain invested for as long as you want.

Limited Life VCTs, on the other hand, have a set minimum holding period of at least five years. This is when the wind-down process begins.

The manager will then allocate capital back to the investors during this time. This can be a good option for those who are looking for a more structured investment.

Here's a comparison of the two:

This can help you plan your investment strategy and make informed decisions.

In recent years, Venture Capital Trusts (VCTs) have raised significant amounts of money to support innovative businesses. £181 million was the average amount raised by VCTs per tax year for the first nine years of their existence.

The amount raised by VCTs increased significantly in 2004, thanks to changes in income tax relief and capital gains tax. £505 million was raised in 2004/05, a sharp increase from previous years.

The record for the largest VCT share offer was set in 2018/19 by Octopus Titan VCT, which raised £227.7 million. This was a notable achievement, considering the overall amount raised by VCTs that year was £731 million.

The COVID-19 pandemic had a significant impact on VCT fundraising, with amounts raised dropping to £619 million in 2019/20. However, the following year saw a 11% increase, with £685 million raised.

A new high was set in 2021/22, with £1.13 billion raised by VCTs. This was the highest amount raised on record, with AIM VCTs contributing £170 million. The year was also notable for fast-selling offers, including Mobeus VCTs, which raised £35 million within a day of opening.

Here is a list of the amounts raised by VCTs since income tax relief was set at 30%:

If you're looking to extract surplus money from your business in a tax-efficient way, a Venture Capital Trust (VCT) can be a great option.

To qualify for a VCT, companies must meet certain criteria, including being listed on a major exchange in the U.K. and employing no more than 250 individuals.

The British government introduced VCTs in 1995 to encourage private sector growth and generate investment from individual investors. This means that investors can indirectly participate in the growth of smaller, private businesses by purchasing shares in VCTs.

Retail investors can buy shares in VCTs that are traded on major exchanges like the LSE, allowing them to take part in the growth of up-and-coming businesses.

Investors can receive income tax relief for 30% of their annual investments of up to £200,000, as long as they hold the shares for a minimum of five years. This can be a significant tax benefit.

Here are the main qualifications for a VCT:

Investors also benefit from a tax exemption on income derived from VCT investment dividends.