Venture capital trusts have backed British companies for 30 years… but should you invest in one?

In November 1994, Ken Clarke, the then Chancellor, rose in the House of Commons to present his Budget.

It included a plan designed to give individual investors access to unlisted private companies with growth potential.

Thirty years on, the venture capital trust scheme has raised more than £12bn for British startups.

In the last financial year, the VCT scheme raised £882 million, its third biggest year of fundraising, behind £1.13 billion in 2021/22 and £1.08 billion in 2022/2023. Since 2018, VCTs have invested around £2.9bn in almost 800 companies.

By comparison, APVs raised just £160 million in their first financial year, 1995-96.

Richard Stone, chief executive of the Association of Investment Companies, says: ‘VCTs are a British success story and have helped create a number of renowned companies, creating thousands of jobs and driving economic growth.

“APVs have made important contributions across industries, from technology to healthcare, from retail to manufacturing.”

For investors, APVs offer the opportunity to invest in innovative British companies that they would not normally be able to access, as well as tax breaks that could be useful for those who have exhausted vehicles such as Isas and Sipps.

However, the high level of risk involved means they are not for everyone. APVs are designed to be long-term investments, and backing startups means investors need to be prepared for the possibility of losing all their cash.

We analyze how APVs work, the companies they finance and who might consider one.

What are venture capital trusts?

APVs allow people to invest in unlisted companies through trusts. Trusts invest their investors’ pooled money in small businesses, providing them with the capital they need to grow.

Chris Lewis, president of the Venture Capital Trust Association, told This is Money: “Where it has traditionally been difficult for retail investors to gain access to investments in high-growth private companies, VCTs have provided a route to back a portfolio of these emerging and expanding companies.

“APVs also offer the opportunity to invest in portfolios of AIM-listed companies.”

The trusts have backed a number of what are now household names, giving them the funds they need to develop.

Brands backed by VCT include non-alcoholic beer brand Lucky Saint, burger chain Five Guys, house search site Zoopla, fintech Wise and pasta delivery company Pasta Evangelists.

APV-backed businesses employ an average of 68 people, compared to just 11 for the average small business. These companies currently employ almost 100,000 people across the UK.

In September, the APV program was extended by a further ten years, meaning it will continue until at least 2035.

Lewis said: ‘HM Treasury’s decision to formally extend the sunset clause for a further ten years was testament to the importance of the scheme and provides a significant boost to investor confidence. Rachel Reeves’ first budget specifically mentioned APVs, and her speech was presented under the slogan “Invest, invest, invest.”

‘At a time when funding from the wider venture capital market has slowed and many start-ups have struggled to raise funds, VCTs invested over £500m in growth companies last year.

“This is a vital boost to the funding landscape in the UK and a testament to the value of the scheme to the national economy in terms of creating new jobs and wealth creation more broadly.”

Data analytics company Quantexa, for example, first raised VCT funding in 2016. As a result, the company has grown to a value of $1.8 billion and generates $100 million in annual recurring revenue.

Vishal Marria, founder and CEO, said: ‘(Venture capital fund managers) Albion VC and Dawn Capital have supported us from the beginning, providing us with valuable advice and feedback.

‘We are a UK founded company… working with global industry leaders. “Venture capital funds and the support of our investors continue to play a vital role in our growth trajectory.”

Should I invest in APV?

APVs are generally considered an investment option for those who have already used up their Isas and Sipps. This is due to the tax benefits of these wrappers, as well as the high-risk nature of venture capital.

VCTs also have an attractive tax offer as they are free of capital gains tax and have a tax-free dividend limit of £500.

Since Chancellor Rachel Reeves recently increased capital gains tax in her Autumn Budget, to 24 per cent for higher rate taxpayers and 20 per cent for those paying the basic rate, APVs have become in an increasingly attractive investment option.

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 tax breaks are offered to make investment by smaller companies attractive and aim to compensate investors for the risk of backing smaller, younger companies.

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

However, it is essential to take advice before deciding to invest money in a VCT, and you will also need to pass checks to prove that you are a “sophisticated” investor.

APV-funded companies are much more likely to fail than more established listed players. Sometimes high risk can lead to high reward, but this is by no means guaranteed.

One estimate suggests that as many as nine in 10 investments in early-stage plans could fail.

APV investors must be able to face the possibility of losing their entire investment and should be able to leave it intact for the five-year period they need to qualify for tax relief.

Lewis said: ‘The Chancellor’s mention of APVs in her recent Budget speech has increased the visibility of APVs as one of the leading options for tax-efficient investment in the UK; along with pensions, ISA and EIS.

‘APVs are, in a sense, an “unsung hero”, as a single investment in an APV can give retail investors access to up to 100 companies in an existing portfolio.

‘Most importantly, as VCTs scale and invest in new businesses, this diversification only increases across sectors and business maturity. There are also the well-known income and capital gains tax advantages of investing in APVs.’