By Jason Hollands

This week marks a significant milestone for the UK’s venture capital trust sector – on Monday it will be 25 years since the first VCT listed on the UK stock market on September 28, 1995. It was also another proud achievement for the Scottish financial services industry, as that pioneering investment company was launched by Murray Johnstone, a venerable Glasgow-based investment manager (later acquired by Aberdeen Asset Management).

Roll on a quarter of a century and today there are more than 70 VCT companies listed on the London Stock Exchange. Since their inception, almost £9 billion has been raised by the sector for investment in small, unquoted and Alternative Investment Market-listed businesses. Many of these have become recognisable names, such as online property firm Zoopla, the first VCT-backed company to achieve a billion-pound valuation, the Fat Face clothing brand, and premium burger chain Five Guys.

So how did these new-fangled investment schemes come about? VCTs were created during Ken Clarke’s tenure as the UK Chancellor of the Exchequer to help bridge a financing gap faced by small enterprises whose needs went beyond the scope of business loans but were too small to be on the radar of most institutional investors. The VCT scheme was therefore designed by the government to incentivise private individuals to back such businesses by pooling their cash together in a new type of specialist, stock exchange-listed investment company. This would enable them to benefit from being invested in a diversified portfolio of minnow-sized companies picked by a professional team. In return for the high risks that backing illiquid private and AIM-listed companies entails, VCT investors were also provided with a cocktail of tax reliefs courtesy of HM Revenue & Customs.

Over the last 25 years, both the VCT tax features and investment rules have seen numerous changes as governments have sought to better target the types of businesses able to receive VCT backing through a very precise and evolving set of rules. However, the essence of the scheme – giving tax incentives for subscribing for shares in a type of investment trust that backs small businesses – has continued under both Tory and Labour UK governments who have consistently recognised the dynamism and job creation that such fledgling enterprises bring to the economy. Businesses that have been backed by VCTs have gone on to become global players in their sectors, such as Edinburgh-based software firm Craneware, which has taken the US by storm and now provides technology services to more than one-third of US hospitals.

Today, VCTs are more focused on younger, early-stage growth companies than they were at inception. Businesses that VCTs are now allowed to invest in are typically less than seven years old, and growing fast, but will often not yet have reached profitability at the time a VCT invests. These businesses are often involved in exciting areas like technology or healthcare, or are utilising digital innovation to market goods and services.

One such example is Parsley Box, an online Edinburgh-based firm, which provides a next-day delivery service for easy-to-store, healthy ready-meals targeted at the older consumer. Parsley Box has seen exceptional demand for its service during the pandemic, when many older people have been shielding. Other VCT-backed Scottish companies that have been making waves include Current Health, a healthcare platform that provides vital sign monitoring so that patients returning home from hospital can be monitored around the clock by a nursing team. Another business providing a service highly relevant during the "new normal” arising from the pandemic is Edinburgh-based QuikServe which has developed a contactless ordering and payment at the table system for the hospitality sector. And for animal lovers, I should mention Blairgowrie-based Bella & Duke, a provider of 100 per cent natural and nutritious dog and cat food, with an online ordering and delivery service model.

Investment in VCTs continues to provide significant tax incentives, with 30% income tax relief available on subscriptions to VCT new share issues (but you must then hold the shares for at least five years) as well as tax-free dividends and gains. These are particularly appealing when consider the number of people paying higher-rate income tax across the UK has doubled from 2.1 million 25 years ago to an estimated 4.2 million today. As more people have fallen in to the web of higher rate taxes, high earners have also seen steady reductions in the amount they can contribute to pensions each year. Unsurprisingly, interest in VCTs has grown as an alternative, legitimate way to reduce an income tax liability as pension allowances have been squeezed.

With speculation rife that Chancellor Rishi Sunak might scrap higher-rate tax relief on pensions altogether in his next Budget in order to plug the gaping hole in the public finances, demand for VCTs could well be set for further growth. At a time when the economy is hurting and many promising young businesses are hungry for cash, access to VCT financing that can help them grow has arguably never been more important, so let’s raise a toast to the future of VCTs on this notable anniversary.

Jason Hollands is managing director of financial planning and investment management group Tilney