Guide to Venture Capital Trusts

Venture Capital Trusts offer a unique combination of potential high returns and significant tax reliefs to investors. This comprehensive guide demystifies VCTs, detailing their structure, benefits, risks, and strategic considerations for inclusion in your investment portfolio.

Understanding Venture Capital Trusts

Launched in 1995, the Venture Capital Trusts scheme is one among three tax-incentivised Venture Capital Schemes, alongside the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

This scheme aims to incentivise private investments into a variety of unlisted, smaller-scale, and higher-risk trading enterprises through the medium of Venture Capital Trusts.

Venture Capital Trusts are publicly listed companies on the London Stock Exchange designed to provide private investors with the opportunity to invest in a diversified portfolio of small, high-growth potential companies. Managed by experienced venture capital firms these trusts aim to generate returns through capital growth and income.

Venture Capital Trusts bear resemblance to investment trusts and are overseen by fund managers, who often belong to broader investment companies. Investors purchase shares in a Venture Capital Trusts, which subsequently allocates investments to eligible trading companies, offering them the capital necessary for their development and expansion.

Key characteristics of the Venture Capital Trust scheme

• Venture Capital Trusts are required to be publicly traded on a stock exchange recognised in the UK.
• They enjoy a tax exemption on corporation tax related to any capital gains from their investment sales.
• Eligibility for Venture Capital Trust investment is restricted to businesses engaged in a qualifying trade, with a workforce of less than 250 full-time equivalent employees, or up to 500 for Knowledge Intensive (KI) companies, at the time of share issuance. Furthermore, these companies must have gross assets not exceeding £15 million prior to the investment and no more than £16 million immediately afterwards.
• To qualify, companies must secure their inaugural risk finance investment within 7 years of their initial commercial sale, or within 10 years for KI enterprises. ‘Risk finance’ investment includes VCT funds, investments through the EIS or SEIS, and any other investments received under measures recognised by the European Commission’s Guidelines for State aid in promoting Risk Capital Investments in Small and Medium-sized Enterprises.
• Qualifying enterprises are permitted to attract up to £5 million in VCT funds within any 12-month period, or up to £10 million for KI companies, subject to a maximum overall limit of £12 million, or £20 million for KI entities. These caps include all forms of risk finance investments received.

The structure of Venture Capital Trusts

Venture Capital Trusts invest in a range of sectors, including technology, healthcare, and green energy, reflecting the dynamic landscape of emerging industries. Their structure allows investors to benefit from diversification, spreading risk across a variety of sectors and stages of business development.

Strategic portfolio consideration

Incorporating Venture Capital Trusts into your investment portfolio requires a strategic approach. It is advisable to consider Venture Capital Trusts as a long-term investment, balancing the potential high returns against the inherent risks. The diversification offered by Venture Capital Trusts can complement more traditional investments, providing a hedge against market volatility and sector-specific downturns.

Venture Capital Trusts offer a compelling proposition for the informed investor, blending potential high returns with significant tax incentives. However, the decision to invest should be made with a clear understanding of the associated risks and in the context of a broader investment strategy. With careful selection and timing, Venture Capital Trusts can play a pivotal role in achieving diversified growth and tax efficiency within your investment portfolio.

Navigating the risks

While the potential rewards of investing in Venture Capital Trusts are considerable, it is crucial to acknowledge the risks. The enterprises within a Venture Capital Trusts portfolio are typically at an earlier stage of development, making them more susceptible to failure. The illiquid nature of Venture Capital Trusts shares can also pose a challenge, as it may be difficult to sell shares at a desired price or time.

Although Venture Capital Trust investments carry certain risks and are not suitable for everyone, they offer unique benefits, including tax incentives, potential for high returns, and the opportunity to support innovative companies contributing to economic growth. As with any investment, it’s important to conduct thorough research and consider consulting with a legal and financial advisor to ensure that VCTs align with your investment goals and risk tolerance.

What legal assistance do you need regarding Venture Capital Trusts?

A solicitor offers invaluable assistance in navigating the complexities of Venture Capital Trusts, specifically:

• Structural Guidance: Solicitors aid in establishing the legal framework of Venture Capital Trusts, ensuring compliance with relevant laws and regulations. They ensure that the trust is structured correctly and meets all legal requirements.
• Document Drafting: Solicitors are responsible for drafting and reviewing essential documents such as trust deeds, investment agreements, and shareholder agreements. These documents outline the rights and obligations of all parties involved.
• Regulatory Adherence: Venture Capital Trusts are subject to strict regulations by the Financial Conduct Authority (FCA) in the UK. Solicitors ensure that the trust adheres to these regulations to avoid legal complications or penalties.
• Due Diligence: Solicitors conduct thorough due diligence on behalf of investors or management teams interested in Venture Capital Trusts. This involves examining the legal and financial aspects of the trust to identify any potential risks or liabilities.
• Transaction Assistance: Solicitors assist in investment transactions, from negotiating terms to drafting contracts and ensuring that transactions are executed legally and efficiently.
• Dispute Resolution: Should disputes arise involving the Venture Capital Trust, solicitors represent their clients’ interests and help resolve conflicts through negotiation, mediation, or litigation.

How Moore Barlow can help

In conclusion, Venture Capital Trusts embody a sophisticated investment choice for those looking to explore beyond conventional markets. Their role in facilitating the growth of tomorrow’s leading companies, coupled with the tangible tax benefits for investors, underscores their value in a diversified investment approach. As with all investments, due diligence, a clear understanding of the risks involved, and consultation with a legal and financial advisor are paramount in harnessing the full potential of Venture Capital Trusts.

At Moore Barlow, we can assist you in establishing, operating, and ensuring compliance with Venture Capital Trusts, offering essential legal expertise and guidance every step of the way.

Contact our corporate transactions solicitors to see how we can help you.