Investors pour record £1.13bn into venture capital trusts

Venture capital trusts have reported a record year of funding in the past year as UK  investors poured more than £1bn into the growth investment vehicles.

VCTs, which provide investors with a means to back UK startup firms and reap tax breaks, recorded £1.13bn investment in the 2021 tax year, a 65 per cent boost on the previous year, according to data from the Association of Investment Companies (AIC).

The investment tops the previous funding record of £779mn set in the 2005-06 tax year, the Financial Times reported.

AIC boss Richard Stone said investors were looking to pump cash into growing firms as they rebuild from the pandemic.

“After the past two tough years, investors are particularly interested in VCTs which support entrepreneurs and help build back the economy,” he said.

But research from the AIC shows that a majority of investors back the trusts due to the tax breaks they offer as well as the ability to back growing firms.

Share issues from VCTs offer 30 per cent income tax credit if held for at least five years, while any dividends and gains are tax free.

Around 88 per cent of investors said they use venture capital trusts for tax relief, and almost two-thirds said the upfront income tax relief was its most important tax benefit.

Analysts at Hargreaves Lansdown have warned of the dangers of backing VCTs as a tax break option, saying they are a far “riskier” bet than more mainstream alternatives.

“Some of the companies they invest in are the growth stories of the future, whereas others will fail entirely. It means VCTs are sophisticated, long-term investments only suitable as a small part of significant portfolios,” said Sarah Coles, senior personal finance analyst.

“VCTs have become even more risky over time too as the rules for what qualifies have become stricter, and larger more established companies have been excluded – along with those supported by subsidies.”

Octopus Titan, which has backed big name startups including Depop, Kazoo and Zoopla, was the most popular VCT in the past year with investors pumping £200m into its portfolio.