Venture Capital Trusts (VCTs) have played a significant role in the UK economy for the last three decades by channeling private investment into early-stage and high-growth companies.
According to a report from the Venture Capital Trust Association (VCTA) marking 30 years since their introduction, VCTs now manage over £6.5 billion in funds, currently back over 1,000 businesses and support well over 100,000 jobs. This growth has been through tech bubbles, financial crashes as well as the general flow of economic cycles and three different governments: Conservative, Labour and a coalition.
The UK is currently the third largest VC market in the world and the Labour Party’s commitment to maintaining VCT tax advantages until at least 2035 will support continued – and likely renewed – investor interest in VCTs. But to deliver their full potential, VCTs need more than just policy consistency – changes in their structure are long overdue.
The role of VCTs in a diverse, modern portfolio
VCTs aim to deliver returns for investors with an appetite for high risk seeking to diversify their portfolio in a tax efficient wrapper, all the while supporting ambitious UK businesses that are often at the forefront of disruption in their respective industries.
Supporting small businesses is a big driver for VCT investors, but the main incentives are unsurprisingly tax relief and dividend yield – with some investors also seeing VCT investment as a partial alternative to their traditional pension fund.
However, the annual investment cap that VCTs are able to make into businesses has not kept pace with inflation or with the rising demand for alternative investment structures. Increasing this cap is needed to encourage greater investment into the UK’s small business ecosystem and to make VCTs more relevant in today’s competitive global investment landscape.
Modernising for continued relevance
As well as investment limits, there’s a growing movement across the industry for a wider set of reforms. The Venture Capital Trust Association (VCTA), Enterprise Investment Scheme Association (EISA), British Private Equity & Venture Capital Association (BVCA) and the Association of Investment Companies (AIC) are actively lobbying for VCT changes ahead of the next Budget. They want to see the government:
- Raising the maximum annual investment limit for VCTs to better reflect inflation and investment appetite
- Extending the qualifying age limit for companies from seven to 10 years, recognising the longer scale-up journeys in complex sectors such as deep tech or life sciences
- Reviewing the rules for knowledge-intensive businesses to allow for more nuanced eligibility criteria
The aim of these suggested changes is to enable more capital to be invested into a broader pool of growing British businesses, which in turn can have a greater positive impact on UK plc.
Changing demographics of VCT investors
The profile of the typical VCT investor is also evolving and needs to be considered in any VCT reforms. In light of recent tax increases and interest rates beginning to fall in the UK, we expect more and more new and repeat investors will consider VCTs as alternative investments.
Today’s investors start younger than those 30 years ago, which is testament to both the foresight of those who launched the VCT initiative – seeing the opportunity to connect with the public to invest in their own future – and the continued appeal of the model.
At YFM, we’ve seen this shift first-hand. In our most recent VCT fundraise for the British Smaller Companies VCT earlier this year, our youngest investor was just 20 years old and many were in their 80s or 90s. Of those who invested, 53% were repeat investors and 47% were new – a sign of strong ongoing interest. We also saw a healthy mix of DIY and advised investors, with the average investment size increasing year on year.
The fact that anyone who pays income tax can benefit from VCT relief makes the scheme unusually inclusive. That accessibility has helped broaden the demographic reach and sustain investor interest through changing economic conditions.
Championing UK small businesses: VCT success stories
The introduction of VCTs predated the internet; early VCT business success stories include the likes of Go Outdoors. As the economy has adapted, so have VCTs: over time, VCT portfolios have evolved to reflect modern growth sectors such as software, AI, healthtech and cleantech.
At YFM, our VCTs have supported a diverse range of businesses, including cloud data integration platform Matillion, enterprise software provider AutomatePro, and other emerging success stories across the UK. These companies not only deliver financial returns but bring high-quality job creation and regional economic impact.
This ability to adapt is combined with an almost unique ability to be patient in their support of entrepreneurs, with VCTs being long-life vehicles that can support long business scale-up journeys.
VCTs need to evolve with the times
To ensure VCTs continue to play their role in supporting UK innovation and delivering for investors, several updates are essential. Raising annual investment limits is one step, but so is raising the company age threshold and simplifying qualification rules. There’s also an ongoing need to improve public awareness of VCTs, making them more accessible through better education and clearer communication of the risks and benefits involved.
VCTs offer a unique opportunity of financial return, tax efficiency and meaningful economic impact. Thirty years on, their role is arguably more important than ever – but to stay relevant, VCTs must keep evolving with the times.
Written by David Hall, partner and executive chairman at YFM Equity Partners.
