What is a VCT?
A VCT is a company whose shares trade on the London stock market, just like Barclays or Vodafone. However, rather than banking or telecoms, a VCT aims to make money by investing in other companies. These are typically very small companies which are looking for further investment to help develop their business.
This is a vital area of the economy, and without funding from venture capitalists many companies we consider household names would never have been able to grow their businesses.
A VCT typically invests in around 20 such businesses. These are chosen by the VCT manager – an expert in identifying opportunities amongst fledgling companies, and attractive deals for investors.
To encourage investment in this crucial area, the government offers generous tax benefits to investors, including tax relief of up to 30% when investing. Tax rules can change and any benefits depend on personal circumstances.
Profits are generally paid to VCT investors as tax-free dividends, which are the primary source of return for VCT investors. The VCT manager will also provide expertise to help their chosen firms expand and provide better returns for their investors. They normally look to sell their share of the business three to seven years after investing and reinvest the capital in the next opportunity.
Different types of VCT
There are a number of different types of VCT.
Generalist VCTs are the most common, and the most popular with investors. They invest in a broad range of companies in different sectors and at different stages of development.
AIM VCTs invest predominantly in companies listed on AIM, or those which are about to list on AIM.
Specialist VCTs tend to invest in just one sector, such as technology. Specialist VCTs are becoming less common.