Budget uncertainty stalks VCT fundraising

Venture capital trust (VCT) fundraising has kicked off in earnest for the 2024-25 tax year, but uncertainty around the future tax regime has brought on a wait-and-see approach. 

Fundraising has looked pretty healthy on the surface, with some 16 trusts seeking investor cash at the time of writing.

Nick Hyett, investment manager at Wealth Club, a firm focused on tax-efficient investments, said the sector had raised £118mn so far for this tax year as of 23 September, compared with £74.4mn at the same point in 2023-24. 

However, the figures are skewed by the fundraising efforts of the Mobeus VCTs, which had already raised £61.3mn of a targeted £90mn at the time of writing. "Mobeus has been very busy," Hyett said. "[It hasn't] raised in the last 18 months or so and [is] popular, and [has] done very well."

He added that the number of offers opening had been "lower and slower" than a year ago.

"We still expect everyone who normally raises money to raise but many are pushing it back to January," he said. And what happens in the Budget will influence future fundraising.

Difficult decisions

Chancellor Rachel Reeves has already warned of "difficult decisions" ahead of the Budget on 30 October, and as we recently noted some form of tax hike does seem likely.

The government has ruled out increasing income tax, national insurance, VAT and the headline rate of corporation tax but pensions, capital gains tax (CGT) and inheritance tax (IHT) remain in the firing line.

The ensuing uncertainty explains why VCT fundraising looks relatively subdued, Moebus excluded. A suspected removal of IHT relief on Aim-listed companies would be a huge blow for the VCTs that invest in such businesses, while more generally pension tax rules should influence how attractive VCTs look.

"You have seen a surge for VCTs on the back of pension changes in the past, but then the lifetime allowance went away and the annual allowance went from £40,000 back to £60,000," said Ben Yearsley, investment consultant at Fairview Investing. "They were quieter years than the previous years.

"The big unknown this year for fundraising is what the chancellor will do in the Budget with pensions,"

Any restriction on the tax reliefs individuals enjoy from pensions could push them back into the likes of VCTs. That could give the sector an opportunity to raise further funds and mean more offers being made available to investors this tax year.

Managed expectations

Plenty of well-regarded VCTs are out this year, with Yearsley pointing to the more consumer-focused Pembroke (PEMB) and other names such as British Smaller Companies (BSV).

VCTs are still an interesting option for those who have used up pension and Isa allowance and have a good stomach for risk.
Investors can claim up to 30 per cent up-front income tax relief on the amount they put into VCTs, provided they hold onto the shares for at least five years.

What's more, the proceeds won't be liable for CGT if investors sell their shares and make a profit. 

However Yearsley said investors should temper their expectations for future returns. "The amount of money coming into VCTs is having an impact on what they're paying to buy the underlying businesses," he said. "They're having to pay more because there's more money flowing around so there's more competition for assets. 

"For five or six years I think VCTs will deliver on average 3 per cent an annum. Tax breaks boost that to 6 to 8 per cent but returns are becoming more lacklustre."