Wealthy investors looking to extend their tax breaks are dumping cash into small companies setting up as venture capital trusts (VCTs).
Entrepreneurs are finding investors eager to fund their projects with £130 million already sunk into their businesses.
The VCT industry has a target of raising £400 million by the end of the tax year on April 5, 2015, and is well on the way to hitting the mark, says a report from fund managers Tilney BestInvest.
The firm also reports that although this is the largest commitment to VCTs recorded at this stage in a tax year, two of the biggest managers, Northern Venture Trust and Isis Equity Partners, are only seeking £4 million this year compared with £90 million combined last year.
In 2014, VCTs raised £440 million for entrepreneurs and their companies – the highest figure for eight years.
Tax efficient investment
A VCT is a tax efficient investment managed by HM Revenue & Customs (HMRC) which offers investors tax breaks in return for lodging their money in the scheme.
The benefits for investors include 30% relief on income tax paid in the year, while any investment grows free from capital gains tax.
VCTs are one of three tax effective schemes for funding businesses – the others are the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
SEIS is generally aimed at startups and allows a maximum investment of £100,000, while EIS is for expanding companies.
Both offer income tax reliefs on entry and capital gains tax exemptions that are also attractive to investors.
The first round of three-year SEIS are about to mature at the end of the financial year.
Tim Levett, chairman of NVM Private Equity, managers of the Northern Venture Trust, said: “Recently, the leading general VCTs have consistently returned a tax-free dividend yield of between 5% and 8%, with some funds offering more.
“When interest rates are as low as they are now, VCTs are very attractive to investors because of their return.
“Also, all the leading generalist VCTs have seen profitable exits, with the companies often sold to mid-market private equity firms or corporate buyers.”
Meanwhile, Patrick Reeve, managing partner of Albion Ventures, which manages of Albion VCTs, argues the scene is set for 2015 to become a good year for VCT investment.
“The economic backdrop supports corporate investment growth and coincides with investors seeking a home for their cash which delivers a satisfactory return.”