Venture Capital Trusts: A New Era for Small Businesses and Investors

Strategic Insights -

The UK government's proposal to establish Venture Capital Trusts (VCTs) aims to encourage private investors to put their money into small businesses, a move that could have significant implications for the country's entrepreneurial ecosystem. A recent example of a successful small business, Phileas Fogg, demonstrates the potential for growth and returns on investment in this sector. However, venture capitalists and investors have raised concerns about the riskiness of investing in small companies and the potential liquidity issues with shares in the trusts.

Key Takeaways:

  • The UK government's budget plans to create Venture Capital Trusts (VCTs) investment trusts to encourage investors to put their money into equity for small businesses.
  • The trusts will offer generous tax relief, including 20% tax relief on investment up front and deferred capital-gains tax due from other asset sales.
  • Profits and dividends from the trusts will be tax-free, and investors will be locked in for five years to retain tax breaks.
  • Venture capitalists are keen to launch the trusts, with Rothschild Asset Management confirming plans to launch a trust in the first half of next year.
  • Investors are being encouraged to view VCTs as part of a diversified portfolio, despite concerns about the riskiness of investing in small companies.
  • Shares in the trusts may prove illiquid, and the tax breaks are only available to investors who buy shares when they are first issued.
  • Most VCTs are likely to have a finite life and will be wound up after a set number of years.

Statistics:

  • The Venture Capital Association invested only £1.2 billion last year.
  • There are a limited number of private individuals who will provide funds.
  • Phileas Fogg, a successful small business, was started in 1982 with an investment of £235,000 and sold to United Biscuits last year for £26 million.
  • The VCTs must be publicly listed, and investors must buy ordinary shares with a maximum investment of £100,000 a year.
  • The trusts will be able to make investments of up to £1 million in companies whose net assets cannot exceed £10 million.

Sources:

  • Sunday Times, 1994
  • "The Sunday Times, 1994"

* Copyright (C) The Sunday Times, 1994