VCTs and EISs are not suitable for every investor but they can be a helpful tool in advisers' tax and even pension planning, especially in a high-inflation environment, according to the guests on the FTAdviser podcast.
"Part of the reason you've seen significant popularity over the past few years in VCTs is, put simply, they've been looked at as a supplementary pension planning product," said Jack Rose, head of retail sales at Triple Point Ventures.
"Pensions on a whole in the UK have continued to be restricted and the pool has narrowed in terms of how you can access them."
The annual allowance taper and freezing of the lifetime allowance, for instance, has made it harder to put money into a pension, whereas VCTs with their tax breaks become an appealing option above the regular planning, he said.
"That's one of the big driving points behind why you've seen the popularity in VCTs versus EIS, because VCTs offer that tax-free income so a yield of 5 or 6 per cent grossed up for an additional rate tax payer is 8 or 9 per cent when you factor that in, when you're looking for income at the moment, given the hunt for yield to combat inflation, and that becomes really persuasive in the longer-term planning for people."
A recessionary environment too can be beneficial for VCTs and EISs, as innovation often happens after a crash, said Kerry Baldwin, managing partner at IQ Capital and former chair of the British Venture Capital Association.
"What we find is after a recession the prices are at the right place, you find that you can attract talent much easier into a lot of these companies because there's talent available and then a lot of these companies go on to be incredibly successful."
She said there was an interesting trend at this particular time that was different to previous recessions, which is that corporates are still investing. "That means those corporates know that technology is going to solve their problems in the future... that means that any investment that I am making big corporates are investing alongside us as well, that is quite a good indicator that it's a good time to be investing."
Sarah Barber, CEO at Jenson Funding Partners, a specialist in early stage investing, said she has seen more deal flow coming through. "It's not just because of the pandemic, I think the early-stage ecosystem in the UK [has flourished]."
This means founders understand that they can get the funding for their ideas, she said.
Budget hopes
The government too has been amicable towards tax efficient investing, but must act now to put previous pledges into action, said Baldwin: "[Sunak] has always had the right people and the right advisers around the table to ask the right questions...
"We have an incredible science base in this country, there's absolutely nothing wrong with our science base, we have innovation throughout the entirety of the UK – it's not a London thing, and what we're doing here is we're saying, 'What are the ingredients that are needed to make Britain this science superpower that we keep talking about?'"
