Ben Yearsley: Right type of VCT is well worth a punt

The Analyst

It is sometimes easy to lose sight of the point of investing, instead getting caught up in other issues such as tax, risk and timing. This is especially true of venture capital trusts. Many people focus either on the tax breaks or the excitement of investing in risky, high-growth, entrepreneurial companies. What often gets forgotten is the purpose of investing in a VCT is to make a profit, and that profit is generally distributed over the longer term via tax-free dividends.

As VCTs have evolved over the past decade the industry has consolidated. There are now fewer management groups, but they are larger and better resourced. Managers have also become more conscious of the importance of delivering consistent dividends to attract investors. Having been a proponent of VCTs for many years now, I for one love the tax-free dividend cheques that come through the letter box.

VCTs are speculative funds investing in small and entrepreneurial companies. Investment limits, like ISA limits, are tax-year specific. You either use the annual allowance or lose it. However, the annual limit is large at £200,000. The VCT shares have to be kept for a minimum of five years to retain the upfront 30 per cent income tax relief, and any dividends or capital growth are tax free. Due to the risks involved they are for more sophisticated investors.

With interest rates close to zero, investors are increasingly searching for alternative sources of income. While VCTs historically had erratic dividend payments primarily based around profitable sales of companies, greater emphasis is now being placed on deal structures that provide regular income for the VCT, which can then be distributed to shareholders. The method is to provide the majority of the investment as a loan to the underlying business with a smaller amount in shares. As well as providing income, loans rank ahead of equity in the event a business fails, making the deal less risky if the company has assets that can be sold.

How well are VCTs faring in delivering these dividends? There is currently £2.5bn invested in VCTs, ranging from high-risk, early-stage start-ups to limited-life VCTs that seek to control risk and are mainly for the tax breaks. In between sit traditional, generalist VCTs. Last year £123m in dividends were paid out by the VCT sector as a whole. From the present capital base this equates to an average dividend yield of just under 5 per cent, tax free. In times of very low interest rates, this is an attractive yield, and definitely one worth considering if you have a large portfolio. When choosing VCTs it is a good sign of a successful VCT manager if they have consistently paid a high level of income without depleting capital.

So which of this year's offers to look at? Thankfully after last year's solar VCT bandwagon, this year provides a return to normality. The majority of offers are either top-ups to existing VCTs or limited-life offers with established records. I have always been sceptical of limited-life VCTs designed to offer the tax break with little investment into proper, growing businesses. It is clear HMRC want VCTs to focus on long-term, growth-orientated companies. Therefore my suggestions are unashamedly all traditional, generalist VCTs: Maven Income & Growth, British Smaller Companies 2 and Edge Performance H Share.

I would strongly urge reading the relevant prospectus prior to investing, but as a very brief summary, Maven looks to back profitable companies in a broad range of areas. It has particular expertise in the oil and gas sector, which is not normally found in VCTs. British Smaller Companies 2 historically had a technology bias, but in recent years has broadened its approach. It tends to invest in earlier-stage businesses than most VCTs, consequently is higher risk, but offers the potential for higher reward. Finally, Edge Performance H Share aims to profit from the exciting growth available in the media and entertainment sectors, fields in which the UK excels.

Importantly, each of these funds invests the majority of its portfolios in the areas that VCT legislation always intended. I believe today's absence of bank lending is presenting plenty of opportunities for just such funds. Venture capitalists are in a strong position and small, successful companies starved of investment are accepting capital on favourable terms to investors.

Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Recruitment Genius: Administrator - IFA Based

    £22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions