Wealthy investors eye VCTs as tax rises loom

More than a third of wealthy investors would be more likely to invest in venture capital trusts (VCTs) if taxes rise further, despite a sharp fall in fundraising following a cut to income tax relief, new research from Wealth Club has found.

The survey of 506 Wealth Club clients, with average estimated wealth of £3.15m, found that 36% would be more inclined to invest in VCTs if taxes increased. A further 27% said they would be more likely to invest in enterprise investment schemes (EIS), while 21% would consider seed enterprise investment schemes (SEIS).

VCTs offer 20% upfront income tax relief, alongside tax-free dividends and capital gains. EIS offers 30% income tax relief, while SEIS provides 50%, with both schemes offering additional tax benefits.

However, the three most popular VCTs to open for investment since September have each raised at least 70% less during their opening days than at the same stage last year, following the reduction in VCT income tax relief from 30% to 20%.

Alex Davies, founder and CEO of Wealth Club, said higher taxes could encourage some investors to put more money into schemes supporting smaller UK businesses, but cautioned that this would not offset the wider economic impact.

“Ironically, there could be a silver lining for British start-ups if higher taxes encourage more wealthy investors to put money into VCTs, EIS and SEIS,” Davies said. “But that doesn't make higher taxes a good thing. They discourage spending, saving and investment, none of which is good for the economy.”

According to the wealth manager, the reduction in VCT relief had already damaged fundraising for smaller companies that rely on the schemes for capital.

Davie said: "The Government has already done a huge amount of damage by cutting income tax relief from 30% to 20%.

"This is money that would otherwise be going into smaller British companies, many of which find it difficult to raise funding. These are the businesses we need to be encouraging, helping them grow and create jobs, not making it harder for them to raise money.

"If the Chancellor wants more money going into smaller British businesses, restoring VCT income tax relief to 30% would be a far better way to achieve it than putting up taxes, which risks reducing demand in the economy. It’s a muddle at the moment and what we need is clearer thinking ahead about how to support the UK’s ambitious start ups and scale ups.’’



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