Investors looking to shield their cash from the taxman before the end of the financial year ploughed money into venture capital trusts.
In the tax year for 2022/2023, these trusts took in £1.08bn, the second highest total on record, according to data from the Association of Investment Companies (AIC).
It was the second time these vehicles had topped the £1bn mark and was 5% less than the previous tax year’s £1.13bn.
VCTs offer up to 30% income tax relief on the amount invested in newly launched shares up to £200,000, which can be offset during the tax year that they are bought. Any dividends or capital growth on the investment are also tax free.
This has become particularly important to investors, as tax rules changed in April. In the previous tax year, savers could claim a capital gains tax allowance of up to £12,300, but this was halved on 6 April to £6,000. Dividend tax allowances have now also been slashed from £2,000 to £1,000.
Investors must hold the shares for five years or they will be required to pay the money back to HMRC.
The fastest-selling VCT was Unicorn AIM, which sold out its £15m fundraise in one day. Others were more ambitious, with Octopus Titan taking in the most new money from investors (£237m), followed by Albion (£80m), Mobeus VCTs (£76m) and British Smaller Companies (£75m).
Alex Davies, founder of Wealth Club, said: “It’s easy to see why VCTs remain attractive. If you are a wealthier investor, you’re caught between higher taxes on one hand and restrictions on where you can invest on the other.”
VCTs invest in predominantly early stage private companies, which is a high-risk approach and therefore make them only appropriate for those who can take the additional volatility. However, Davies said this could also be a blessing.
“Taxes are at a 70-year high and traditional investments such as pensions and buy-to-let have been squeezed. Venture capital trusts stand out. They’re simple and highly tax efficient for a start. But it’s not just about saving tax, VCTs are also exciting: you’re backing some of Britain’s youngest and brightest companies and, probably adding something completely different to your portfolio,” he said.
Davies added that investing in these vehicles is good for UK businesses and the domestic economy, with money channelled to more innovative companies.
In 2022, £700m was invested by VCTs into new and follow-on investments in small private companies or AIM, with 93% going to the former and 7% the latter.
Richard Stone, chief executive of the AIC, said: “This much-needed support to the UK’s fast-growing companies helps deliver vital economic, social and environmental advantages to the country.
“It’s crucial VCTs can continue to fund young businesses which create jobs, develop skills and knowledge, increase exports and raise the tax take across many sectors including healthcare and technology.”
The outlook for this remains strong, according to Davies, with many tax allowances set to be slashed again in April 2024, making them a haven for wealthier investors.
Wealth Club statistics showed that the average investor through the specialist broker is male (81% versus 19% female) and aged around 58 years old.
On average, VCT investors put in £12,560 into the tax-efficient investments, with 172 people maximising the £200,000 allowance through the broker.