An economic downturn can be a good time to invest in venture capital trusts as they tend to generate better returns when raised during tough times, says Nick Britton, head of intermediary communications at the Association of Investment Companies.
The UK is poised to enter recession this year, though experts are at odds over how deep or prolonged the downturn will be.
And while VCTs and the enterprise investment scheme are not immune from recession, the kind of businesses they invest in are not typical of the broader UK economy, says Britton.
Investors may even benefit from jumping aboard while times are tough as capital is scarcer and valuations are more attractive, meaning returns could be better than when funds are deployed near a market peak, he says.
Besides, VCTs are long-term investments and offer very attractive tax reliefs, which are particularly beneficial for tax planning in a high inflation, high wage growth environment "without the worry that comes with more aggressive tax planning that may fall foul of HMRC".
In a Q&A with FTAdviser In Focus Britton explains what makes VCTs attractive and why fundraising will be strong this year, despite a lacklustre performance last year.
FTA: What impact is the current high tax environment having on tax-efficient investing?
NB: There’s strong demand for VCTs from investors, with a record £1.13bn raised last tax year.
Some of this is the result of the squeeze on the pension annual allowance for high earners, which has encouraged the likes of doctors and dentists to look at tax-efficient investments.
FTA: What role do tax-efficient investments play in a high inflationary environment?
NB: Earnings are rising slower than inflation, but faster than tax thresholds and allowances.
That means that more people are driven into higher tax bands and find it harder to shelter their income and savings from tax.
As government-backed schemes, VCTs and EIS provide attractive tax reliefs without the worry that comes with more aggressive tax planning that may fall foul of HMRC.
FTA: We're most likely entering a recession this year, why would investors and advisers still consider VCTs and EISs?
NB: It would certainly be wrong to say that VCTs and EIS are immune from recession.
However, the kind of businesses they invest in are not typical of the broader UK economy. They are small, specialised businesses with high growth potential that target particular market niches.
Many VCTs invest in companies that provide important services to other businesses and enjoy the advantage of recurring revenues.
We’d also expect advisers to look beyond the immediate economic circumstances: VCTs are investments with a minimum holding period of five years so they are long-term by definition.
