The amount raised by Venture Capital Trusts (VCTs) has risen by over £100 million in a year which is good news for start-ups and growing businesses.
VCTs issued shares to a value of £570 million in 2016-17, a 28% rise over the previous year according to stats released by HMRC recently.
“The increase in the amount of money that is available to benefit start-up and scale-up industries is great news for all involved,” said Nick Travis.
“It gives those people looking for funding another avenue to obtain it. There have been some innovative businesses such as MPP, Quantexa or Egress that have used funding from VCTs to their advantage. Our own clients and respondents have noticed an uptick in the amount of funding available to them in recent times.”
A VCT is a tax based Venture Capital Scheme. It is designed to encourage individuals to invest indirectly in a range of unquoted smaller, higher-risk trading companies, by investing through VCTs. The VCT must be listed on a UK recognised Stock Exchange but are exempt from Corporation Tax and any Capital Gains Tax (CGT) on disposal of shares.
Research of entrepreneurs and business leaders has highlighted how 44% believe access to funding is improving, an 11% rise from three months ago. This coincides with 70% of the, near 200, businesses asked are planning for growth in the next 12 months.
“Funding is a key issue for scale-up businesses, whose success crucial to the UK economy. It is important that the UKs growth businesses are adequately funded so it is encouraging to see that one of the sources of funding has seen record growth,” said Nick.
Tax changes paying dividends for small businesses
A key reason for the rise in VCT use is the changes to the taxation of retirement planning. From April 2016, the lifetime allowance (LTA), the total amount able to be tax efficiently invested in to a pension, was reduced to £1m, a decline of over £800k in four years. This was coupled with changes to the annual allowance, the total amount which could be invested each year.
“This reduction hit far more people than expected. It brought thousands of civil servants, NHS professionals and lecturers in to the group of people that actively had to reconsider their retirement planning strategy. No longer was active pension planning the remit for, those traditionally considered wealthy,” said Luke Brooks.
Fixed protection was introduced at the same time for those who had been relying on the previous LTA. This capped pensions at the pre-2016 amount of £1.25m but prevented individuals from investing further in to their pension scheme.
“Many, arguably more than the Government expected, stopped putting money directly in to their pension and were forced to consider alternative assets to invest in for their retirement. EIS, SEIS, and VCTs are increasingly becoming mainstream alternatives to pension funding. However, these assets, while potentially allowing greater return, are riskier so it is vital that anyone using them for retirement diversify their retirement pot,” said Luke.
VCT investment allows the individual investor income tax relief at the rate of 30% up to £200,000. No income tax or CGT is payable on dividends from ordinary shares.
“The best avenue to save for retirement is normally a pension. However, for individuals affected by the tax changes then investment in VCTs offers a great alternative. The fact that dividend payments are tax free means that VCTs can be a really attractive investment for those planning for retirement,” said Luke.
More than just the money
“When we were searching for funding during our Series B investment earlier this year we considered a variety of different options available to us; EIS, SEIS, HNW, PE etc. Ultimately though we primarily considered the ‘fit’ of the individual investors involved,” said Paul Johnson, MPP Global’s CEO and Co-Founder. MPP Global is a cloud platform service which identifies, engages and monetises digital audiences.
“The people behind our VCT funding understood our aspirations and were the best placed to help us get there. The increase in amounts of VCT funding is great news, for businesses such as ours, as it means another avenue of funding is available. However, I would encourage any scale-up business to consider the benefits of the funding rather than necessarily the type of funding they offer,” finished Paul.
Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.
VCTs/EISs are unquoted investments which are highly illiquid, with investors potentially having difficulty in realising their investment at a given time. They should therefore only be considered as a long term investment, i.e over five years. They also carry the risk of potentially losing all or part of your capital investment and therefore the return of your capital is not guaranteed
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.