Record year as venture capital trust fund raising nears £500m

Venture Capital trusts, which offer private investors exposure to some of Britain's smallest companies, have raised a record amount of money in the tax year which ends this week.

Venture Capital trusts, which offer private investors exposure to some of Britain's smallest companies, have raised a record amount of money in the tax year which ends this week.

VCTs had raised £441m by the end of March, beating the previous record of £433m set during the 2000-01 tax year.

The figures represent a return to favour for the VCT sector, and have contributed to the dramatic strength of the AIM stock market for growth companies, into which VCTs can put money.

The recovery follows a new tax break to encourage private investors, announced last year by Chancellor Gordon Brown after VCT managers had raised just £58m during 2003-04. Purchases of new VCT shares in both the current tax year and 2005-06 qualify for 40 per cent income tax relief, reducing the cost of a £10,000 investment to just £6,000.

David Knight, of the tax-efficient investment specialists Allenbridge, said: "There is no doubt the 40 per cent tax break is behind the new-found popularity of VCTs; sales could even reach £500m before the end of the tax year on Tuesday, because many investors leave it to the last minute to claim this sort of tax break."

In return for backing the funds, which are more risky than conventional collective vehicles, investors get upfront income tax relief, sales of VCT shares are free from capital gains tax, and no income tax is payable on dividends.

However, VCT experts are concerned investors will again lose interest in the sector once the two-year 40 per cent income tax relief offer comes to an end next April. Justin Modray, of the independent financial adviser BestInvest, said: "We will go from feast to famine unless some sort of new tax break is introduced to replace this relief."

VCT fund managers must invest at least 70 per cent of assets in companies worth no more than £15m. They may invest no more than £1m in any one company, and may only consider unquoted businesses, or those listed on AIM.

AIM had its strongest month yet for flotations in March, the quarterly survey of IPO activity by KPMG Corporate Finance found. For the first quarter as a whole, 93 companies joined AIM, raising a total of £524m. Only two companies joined the main market, raising £75m.