Investors flock to private equity funds amid fears of looming tax hikes

Two Mobeus venture capital trusts raised £9.6m through Wealth Club in just one hour since opening their latest share offering on 2 September.

This was a 140 per cent increase in funding on the trusts’ previous fastest raise. VCTs have now raised £33.8m, of which around 60 per cent has been raised through Wealth Club.

The fundraising deadline is September 24.

The two VCTs, both managed by Gresham House, aim to raise at least £70m. The share offer includes a £20m over-allotment option.

Nicholas Hyett, investment manager at Wealth Club, an investment service for experienced and high-net-worth investors, said: ‘The pace of fundraising is encouraging.

‘Following the general investment malaise of the last two years and the fall in venture investment, it seems that wealthier investors, when presented with a good opportunity (as is the case with Mobeus VCTs), are still more than willing to back young, innovative UK companies.’

‘This is good news for the investment world and even better news for the economy as a whole: young companies are vital for job creation and growth.’

The surge in investment, which has kicked off the VCT fundraising season, coincides with uncertainty over the prospect of a capital gains tax increase by the Government in the upcoming autumn Budget.

With fears of a looming capital gains tax hike mounting, investors appear to be looking to reduce their exposure to the tax.

VCTs not only offer investors tax relief and tax-free dividends, they are also exempt from capital gains tax.

As a result, investors may be interested in taking advantage of these tax benefits by transferring their non-ISA holdings to reduce their tax liability later on.

The two VCTs on offer are a combined portfolio of around 50 companies, ranging from early-stage companies to more advanced-stage companies that are already profitable.

Over the past five years, VCTS have generated a total return of 71.2 percent.

However, before you rush into purchasing a VCT, it is important to consider the risks.

What do VCTS offer and what are the dangers?

One of the main attractions of investing in VCTs is the tax breaks they offer. These tax breaks are offered to make investing in smaller companies attractive and are intended to compensate investors for the risk involved in backing smaller and younger companies.

VCT dividends are not subject to the £500 tax-free dividend limit, but are entirely exempt from tax. Meanwhile, investors can also get 30 per cent tax relief upfront if they hold their investments for at least five years.

In addition, investments in VCTs are exempt from capital gains tax.

VCTs offer investors access to smaller companies that are often experiencing rapid growth. This means that astute investors can earn considerable returns while also helping young companies obtain the funding they need.

In addition to this, investing in smaller companies is less affected by broader market movements, meaning it can be a good way to diversify a portfolio.

However, VCTs are considerably riskier than many other investments.

High risk can come with high reward, and these companies can grow incredibly fast.

On the other hand, investors should keep in mind that smaller companies have a higher failure rate than their larger counterparts.

In addition to this, there is no active VCT market, meaning that finding a buyer for your shares may be difficult and you may have to accept a price lower than the net asset value of the investment.

Who are VCTs aimed at?

Given their risky nature, VCTs tend to be more popular with wealthy investors who have already maxed out their tax limits.

Unlike an ISA, which has an annual allowance of £20,000, the VCT allowance is £200,000, meaning these investors could save up to £60,000 in upfront tax.

These investors are also better able to withstand the loss of their investment and can leave it intact for the five-year period they need to qualify for tax relief.

Wealth Club said those close to retirement or already retired can also benefit by investing in VCTs, using the tax-free dividend to supplement their pension income.