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Investors save millions in tax by pouring cash into fledging stocks

Investors have put a record £580m into venture capital trusts so far this tax year, more than double the £280m they had invested at this point in 2021.

Demand for VCTs is booming as investors hunt out ways to reduce their tax bills, with the Government bringing in higher dividend taxes this year and failing to increase tax-free pension and Isa allowances in line with inflation. 

Taxes on dividends will rise by 1.25 percentage points in April, to 8.75pc for basic-rate income tax payers and 33.75pc for higher-rate payers.

VCTs, which invest in fledgling British businesses, pay out some of their returns to investors through dividends, which are free of tax, and also come with 30pc income tax relief if held for five years. Capital gains from VCTs are also tax free and there is a £200,000 investment limit. 

Alex Davies, of VCT broker Wealth Club, said tax rises were spurring demand for VCTs but argued the success of British start-ups was also a big draw. 

“Whereas once most people invested in VCTs primarily for the tax benefits, the investment backdrop is now extremely strong and VCTs should be seen as an important asset class in their own right. 

“There are now seven VCT-backed companies, nicknamed ‘unicorns’ that have reached $1bn (£730m) valuations.”

These include property website Zoopla, fashion retailer Depop, car firm Cazoo and recipe box provider Gousto.

Some funds have already filled up, such as Octopus Titan, which raised £200 million in 28 days. Amati Aim VCT raised £40 million in four and a half days, and British Smaller Companies which raised £60 million in 50 days.

It is not too late for investors to get on board. Albion, a fund manager, opened six VCTs in January and wants to raise £80m. 

Its funds invest in a broad spread of sectors, including healthcare, financial technology, computer software and renewable energy, across a range of company sizes. The VCTs target annual dividends of 5pc of net assets, to be paid twice a year.

Pembroke VCT has raised £24m of its £40m target. Launched in 2013, this year it achieved its first two profitable exits – fresh pasta delivery service Pasta Evangelists and cold-pressed juices and nut-based milks producer Plenish. 

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