Complete Guide to Venture Capital Trusts

The Complete Guide to Venture Capital Trusts (VCTs)

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08 June 2022

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Introduction

The Venture Capital Trust scheme was introduced by the UK Government in 1995, in a bid to encourage investment into young, entrepreneurial businesses in the UK. And since their inception, Venture Capital Trusts (or VCTs) have raised a staggering £8.7b in total. 

Over the years, VCTs have attracted investors by offering unique tax advantages and the opportunity to diversify their portfolios. According to HMRC, whilst the overall number of companies operating as VCTs decreased in 2021, the amount of investment raised in the 2020-2021 tax year was up 4% from 2019-2020. And this continues to grow, reaching £1.13b in 2021-2022 (up 65% on the previous year). 

In this guide to Venture Capital Trusts, we explore how they operate and the VCT tax benefits that are available to investors. We also look at recent policy changes to the Venture Capital Trust scheme and the different types of VCTs you might come across. 

What is a Venture Capital Trust?

Venture Capital Trusts are listed investment companies that have been approved by HMRC. Similar to other investment trusts, VCTs pool together capital to invest in private companies. Unlike traditional funds, however, VCTs raise funds by listing on stock markets. VCTs may look like other public companies that trade on stock exchanges, such as Skyscanner and Darktrace, but the capital that they raise is instead used to fund small companies in the UK. 

While many VCTs are sector-agnostic, others may focus on particular industries to maximise their tax-efficient investments. Octopus Titan VCT, for instance, focuses on tech-enabled businesses with high growth potential, whereas funds like Pembroke VCT specialise more in consumer-driven companies.

How does the VCT scheme work?

The Venture Capital Trust scheme is a tax relief programme in the United Kingdom. It was created by the Government with the aim of promoting investment into innovative but high-risk companies by private investors, in return for various tax benefits. The primary intention behind this scheme is to promote the advancement of UK businesses and thus aid economic growth and job creation. 

Alongside the VCT scheme, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are similar government-backed programmes that use tax exemptions to incentivise investors to back early-stage businesses in the UK. These schemes provide investors with generous reliefs against income tax, tax dividends, and capital gains tax, when their funding is used in specific scenarios.

VCTs offer access to funding for startups and small businesses that are not listed on any designated recognised stock exchanges (companies listed on AIM or the AQSE Growth Market are considered to be not listed). VCT-qualifying companies must have fewer than 250 full-time employees (or 500 for Knowledge Intensive companies) and can raise up to £5m per year (or £10m for KI companies). To benefit from the VCT scheme, a Venture Capital Trust must:

  • Be listed on a UK recognised market, such as the London Stock Exchange
  • Publish its own annual report and accounts
  • Have an independent Board of Directors to look after the interests of shareholders
  • Hold general meetings for shareholders, including an AGM
  • Meet standard corporate governance policies

The UK Government website includes further information on VCT investment regulations here. 

What VCT tax reliefs are currently available?

Alongside offering great growth potential and diversification of investment portfolios, VCT tax rules provide an additional incentive for VCT investors to back higher-risk companies in the UK. There are three types of tax relief available to VCTs:

  • Income Tax: Individual investors are awarded Income Tax relief of 30%, up to ÂŁ200k annual investment. To obtain this tax relief, they must have held their VCT shares for at least five years, and tax breaks can only be claimed in the tax year invested.
  • Dividends: No Income Tax is payable on dividends from ordinary VCT shares in VCTs. 
  • Capital Gains Tax: No Capital Gains Tax is payable on the sale of ordinary shares in VCTs. This applies to both previously owned and new shares. 

How has VCT legislation changed?

VCT legislation has evolved significantly since 1995, to ensure that tax-advantaged VCTs continue to fund enterprises that are most in need of long-term financial support in order to scale. There have been several amendments to the VCT scheme in recent years, including the tax benefits on offer. Here’s a rundown of some of these key changes:

2004-2005

  • The maximum investment allowing for tax relief increased from ÂŁ100k to ÂŁ200k

2006-2007

  • Income Tax relief was reduced from 40% to 30%
  • The holding period for individuals with VCT shares increased from three to five years

2007-2008

  • Qualifying shares were limited to smaller companies with fewer than 50 full-time employees at the time shares were issued
  • Companies must have raised no more than ÂŁ2m in any 12-month period, under any or all tax-based venture capital schemes (VCT or EIS)

2012-2013

  • VCT-qualifying holdings were extended to companies with fewer than 250 full-time employees, and gross assets of no more than ÂŁ15m before investment and ÂŁ16m after investment
  • Annual investment limit for companies increased to ÂŁ5m

2014-2015

  • VCTs could no longer return share capital to investors within three years of issuing the shares
  • Investments conditional on a share buy back or made within a six-month period of a sale of shares in the VCT would no longer qualify for Income Tax relief (to prevent multiple claims to income tax relief on essentially the same investment)

2015-2016

  • Companies now subject to a lifetime limit on investments received under the venture capital schemes (EIS, SEIS, VCT and Social Investment Tax Relief)
  • Any investment must be made into a company within seven years of the first commercial sale (10 years for KI companies)
  • Maximum number of employees at investment increased from <250 to <500 for KICs
  • Investees are no longer able to use money raised to fund acquisitions of other companies. Investment must be used to promote the growth and development of the business.

2017-2018

  • VCT-qualifying loans must be unsecured and returns must not be above 10% of the loan capital
  • 30% of funds raised by a VCT in an accounting period to be invested in qualifying holdings within one year
  • VCTs have 12 months to reinvest any gains from investments
  • The amount of VCT funds that must be held in qualifying holdings increased from 70% to 80%

Types of Venture Capital Trusts

There are three main types of VCTs in the UK:

  • Generalist VCTs invest in companies spread across a range of different industries and sectors, with the aim of creating a diversified portfolio. Nearly 75% of all VCTs belong to this category.
  • Specialist VCTs have more strategic investment objectives, investing in specific industries that may carry more specific risk but can offer higher returns.
  • AIM VCTs invest in smaller companies listed on the London Stock Exchange’s Alternative Investment Market (AIM). AIM shares are generally found to be easier to buy and sell than shares of privately-owned businesses.

VCTs backing UK companies

Below are just a selection of the Venture Capital Trusts that we track on the Beauhurst platform, all currently backing fast-growth companies in the UK.

Pembroke VCT

Managed by Pembroke Investment Managers, Pembroke VCT is a private equity and venture capital fund that offers access to the fund’s portfolio of growth-stage businesses. It is particularly focused on consumer-driven companies, encompassing various sectors such as design, education, food, beverage, hospitality, wellness, digital services and media. 

Pembroke VCT’s Fred Ursell told us that the fund aims to build a “founder-friendly environment” which attracts the best companies whilst also helping to build better businesses. According to Ursell, VCTs are uniquely situated to support early-stage companies that might miss out as a result of traditional VC growth requirements. 

Pembroke VCT has invested in a wide range of high-growth consumer businesses so far. These include the sustainable sportswear brand TALA, (recently exited) pasta delivery service Pasta Evangelists, and women’s clothing brand ME+EM.

Foresight VCT

Managed by Foresight Group, Foresight VCT is primarily centred on Software-as-a-Service (SaaS) businesses. SaaS companies in its portfolio include the marine analytics platform Vaarst, and radiology reporting software developer Hexarad Radiology. 

Despite the large number of SaaS businesses within its portfolio, Foresight VCT does invest in companies across various industries. Other high-growth companies receiving investment from Foresight include organic food brand The Naked Deli, e-commerce advisory service Space 48, and the gym chain Ten Health & Fitness.

Seneca Partners

Launched in 2011, Seneca Growth Capital VCT has built a diverse portfolio of both unquoted and AIM/AQSE quoted growth capital investments. Seneca Partners manages the generalist VCT’s B share pool investments, whilst its ordinary share pool is run by various members of the Board of Directors. 

Seneca Growth Capital VCT’s portfolio companies include rapid test developer and manufacturer Abingdon Health, which played a key role in providing lateral flow tests during the COVID-19 pandemic. Also included are fashion retail marketplace SilkFred, cancer therapeutics drug developer Evgen Pharma, and SaaS workplace platform Vizibl.

Baronsmead Venture Trust

Baronsmead Venture Trust is a generalist fund that’s based in London. The VCT is managed by Gresham House and invests in a wide variety of early-stage and growth businesses across the UK. Its portfolio spans a range of sectors including: fintech and banking, e-commerce, healthcare, and SaaS businesses. 

Baronsmead Venture Trust has backed high-growth businesses such as Funding Xchange, which operates a website that allows SME owners to compare information on business funding options and quotes from credit providers. The VCT also invested in a ÂŁ3.3m equity fundraising round with Patchworks, a web-based software company that helps retailers to monitor and analyse traffic from a myriad of in-store and online channels.

Hargreave Hale AIM VCT

Run by fund manager Canaccord Genuity Group, Hargreave Hale AIM VCT is predominantly known for its success with e-commerce businesses, providing them with specialist knowledge and access to a refined business network. 

Within Hargreave Hale’s portfolio is Gousto, a company the VCT first partnered with in 2019, following its participation in an £18m fundraising campaign. Gousto is now valued at £1.44b and is set to create hundreds of jobs in the UK with the development of its new fulfilment centre. Gousto’s impressive growth is a prime example of how the VCT scheme can support small companies and entrepreneurs in the UK.

Triple Point VCT

The Triple Point Venture Fund works alongside innovative early-stage businesses. The VCT has provided over ÂŁ450m of funding to 160 VCT/EIS qualifying companies in total, actively pursuing opportunities to collaborate with high-potential businesses.

Its portfolio of high-growth UK companies includes Veremark, which uses blockchain-powered software to automate the process of background checks. Triple Point Venture Fund has also invested into Quit Genius, which develops an online therapeutics tool to help users combat smoking additions, and Vyne, a payments business that uses Open Banking APIs.

YFM Equity Partners

YFM Equity Partners is a Leeds-based private equity firm that currently manages two SME-focused VCTs, alongside its Buyout Funds. The British Smaller Companies VCTs provide portfolio companies with growth capital (between £2m and £10m) and opportunities for expansion into new markets through YFM’s network. To date, they’ve raised funds from over 10k investors. 

YFM has a varied portfolio across the tech and software industries, including sectors such as SaaS, lawtech, VR and media post-production. Most recently, it invested ÂŁ5.00m into text analysis software venture Relative Insight, one of several high-growth UK companies backed by the firm’s VCTs so far.

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