The UK's venture capital trusts sector, which continues to enjoy significant tax breaks, has logged the third-higher level of funds raised in a financial year, of £435.7 million ($729.1 million), new figures show.

The funds raised represented an 8 per cent rise from the previous 12 months.

The previous tax year raised £402.7 million, according to the Association of Investment Companies.

VCTs, which have been around as tax-deductible investments in the UK since the mid-1990s, are designed to fund business startups and small-cap companies; their attraction as a source of financing has increased as conventional bank lending to firms has been squeezed in the current economic climate. Also, as the UK government has curbed tax-free pension savings for higher earners, VCTs and similar vehicles have been touted as attractive alternatives.

The VCT sector raised £420.2 million in the 2013/14-tax year if enhanced share buy-backs are deducted; an increase of 56 per cent on the £269.4 million raised in the previous tax year and the fourth highest level of annual fundraising.

Meanwhile, £17.3 million ($28.95 million) of funds raised in the year to 5 April 2014 were a result of enhanced share buy-backs, just 3.9 per cent of the total figure raised. During the same period in 2013, 33 per cent of funds raised were resulted from enhanced share buy-backs.  

In the year ending on 5 April 2014, there was a 12 per cent increase in total assets of all VCTs from £2.87 billion ($4.80 billion) to £3.21billion ($5.37 billion).

“It is clear that demand for the sector continues to grow, as investors recognise the place of VCTs in a balanced portfolio and the role that tax reliefs play in offsetting the inherent risks of investing in smaller companies,” said Ian Sayers, direct general, AIC.