In volatile times, VCTs can be a significant investment opportunity

It’s been a challenging time for investors. Global equity markets are still reeling from the introduction of US President Donald Trump’s global trade tariffs, the consequences of which are likely to keep playing out in the months and years ahead. Now might be a good time for advisers to talk to clients about making sure they own a well-balanced and diversified investment portfolio featuring a broader range of asset classes. Perhaps it’s also time to look at tax-efficient investments, such as Venture Capital Trusts (VCTs), which can give investors the benefit of some much-needed portfolio diversification, while also claiming several tax incentives. 

What is a VCT? 

A VCT is a public limited company (plc), which means its shares are listed on the London Stock Exchange. When someone invests in a VCT, they buy and own shares in the VCT itself, not the underlying companies held within the VCT portfolio, although their shares mean they participate in the successes and failures of the portfolio overall.  

VCTs aren’t new. In fact, they’ve been part of the UK investment landscape since 1995. They were introduced as a government-backed way to encourage more investment into unlisted early-stage companies. Why? Because smaller companies are considered the “backbone” of the UK economy. These companies make a difference by creating jobs, boosting economic growth, and often become successful through world-class innovation.  

What tax reliefs are available?  

A VCT investor can claim up to 30% upfront income tax relief on as much as £200,000 invested in one or more VCTs per tax year, provided the VCT shares are owned for at least five years. This means a £200,000 investment could reduce a client’s income tax bill by up to £60,000. This tax relief is claimed via Self-Assessment or by contacting HMRC, although the amount of income tax relief claimed cannot be more than the amount of income tax owed or already paid. 

For investors, being able to claim upfront tax relief immediately helps offset some of the downside risk of the investment, delivering a significant benefit at the outset. There’s also no tax to pay on any dividends paid by the VCT, and any growth on the value of the VCT investment itself is also tax free. 

The investment itself is the opportunity
But the tax relief is just one aspect of what makes owning a VCT a valuable investment. VCTs invest in small, early-stage businesses with strong growth potential – the companies of the future. Of course, these companies are not immune to broader economic challenges, but they often operate in innovative sectors, meaning they have the chance to grow independently of larger market cycles. Don’t forget, the UK is a hotbed of innovation in key industries such as life sciences and healthcare, fintech (financial technology), and deeptech (technology based on scientific advances and discoveries, or on engineering innovation). In 2024, the UK was ranked third in Europe and fifth out of 132 global economies featured in the 2024 Global Innovation Index.1 Investing in companies in these sectors that qualify for VCT funding gives investors the opportunity to access potentially game-changing businesses at an early stage of their life cycle. 

Also, it’s worth remembering that smaller companies are usually nimbler than their larger counterparts, with the ability to pivot and adapt quickly when conditions change. At a time when global tariffs are putting pressure on international trade and supply chains, this flexibility could become a real advantage. Also, most smaller businesses are more focused on their domestic markets and less tied to global manufacturing or complex international supply routes, making them less exposed to the risks of disruption. This agility could prove a notable strength – giving these companies a distinct competitive advantage over larger firms that find it harder to adapt and remain profitable. 

The value of diversification
Investors should recognise that VCTs are high-risk investments, because not all early-stage companies will go on to be successful. VCTs manage this risk by investing in large portfolio of companies (the Triple Point Venture VCT, for example, is currently invested in over 50 companies). This means the knock-on impact on investor returns from any single company failure is limited. And for investors with a larger portfolio, VCTs can offer exposure to a completely different part of the economy than most listed equities or bonds. 

Is now the right time to diversify into VCTs?
It might sound counterintuitive to consider investing right now, but the current challenging conditions for equity markets give VCTs an advantage, as well as an attractive entry point in the search for exceptional companies. Periods of economic weakness mean VCT managers can invest in early-stage businesses at lower valuations, improving long-term return potential. These companies may also be less exposed to the same market pressures affecting listed stocks, giving investors access to a different part of the economy with growth potential not closely tied to the wider economic cycle. 

And, at a time when traditional investments are struggling to deliver returns, and may do for some time, the tax reliefs offered by VCTs become even more valuable in terms of the total return on investment. For investors willing to make the most of the tougher market conditions, a VCT could prove a welcome addition to an existing portfolio. 

Important information 

This article is an advertisement for the purposes of the Prospectus Regulation Rules and is not the prospectus. The Triple Point Venture VCT carries all the risks of investment in smaller companies and places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change. Tax reliefs depend on the VCT maintaining its qualifying status. Investors should only subscribe for shares on the basis of information contained in the Prospectus which is available via the Documents section of the website. This article has been approved by Triple Point Administration LLP, which is authorised and regulated by the Financial Conduct Authority. 

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