What Are Venture Capital Trusts?

The VCT scheme started on 6 April 1995. It is designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, by investing through Venture Capital Trusts (VCTs). So, if you invest in a VCT, you spread the investment risk over a number of companies.

VCTs are listed on the London Stock Exchange and provide capital finance for small, expanding companies with the aim of making capital returns for investors. They are a tax efficient way to invest into UK smaller companies.

Investors can invest up to £200,000 and receive tax relief on the investment. As little as £3,000 can be invested, which mean they are available to most investors.

Tax Relief is paid up front, and new VCT shares need to be held for 5 years in order to retain the initial tax reliefs. To retain Government approval as a VCT, 70% of its investments(by value) must be held in 'qualifying holdings' - shares or securities in companies which meet the conditions of the scheme. 

What are the Tax Reliefs Available for Investors?

You have to hold a new* VCT investment for a minimum of 5 years to benefit from the following tax reliefs:

  • Income tax relief at the rate of 30% on the amount subscribed for the shares, available on investments up to £200,000 in a tax year. (e.g. An investment of £40,000 into a VCT will mean up front tax relief from the HMRC of £12,000 making the net cost of the investment £28,000).
  • Income tax exemption on dividends paid by the VCT.
  • Capital Gains Tax (CGT) exemption on disposal of the shares.

*Second hand VCT shares, acquired through the Stock Exchange for example, still provide tax free growth and tax free income, but income tax relief cannot be claimed on these shares.

Tax reliefs are only available to individuals aged 18 years or over and not to trustees or companies who invest in VCTs.

Who Should Invest in a VCT?

This type of investment would be suitable for investors who are looking to:

Take advantage of income tax relief Diversify the existing investments by utilising a fund which typically does not follow stock market cycles Find alternative or complimentary solution to pensions Find potential significant capital growth in today’s financial markets How and when can I claim Income Tax relief when I invest in a VCT?

You should claim the relief in your tax return for the year in which the shares were issued. However, you do not necessarily need to wait until you send in your tax return to get the benefit of the relief. You can do this once the shares which qualify for the relief have been issued to you by contacting your Tax Office.

If you pay tax under PAYE, and want the relief immediately, you can ask your Tax Office to adjust your tax code.

If you do not pay tax under PAYE, but are due to make Self Assessment payments on account, you can, subject to certain conditions, make a claim to reduce these. To receive the relief this way, please contact your Tax Office and ask them to tell you the qualifying conditions for making a claim to reduce payments on account and explain how to make a claim. When making your claim, you must bear in mind that we will charge you interest or penalties or both if your claim proves to be excessive.

Whether or not you claim relief in either of these ways, you must enter details of your investment on your tax return for the tax year in which your VCT shares were issued. The amount of relief you get cannot exceed your Income Tax liability for that year. For example: if you subscribed £20,000 for shares issued in the tax year 2009-10 your maximum Income Tax relief would be £6,000. However, if your Income Tax liability in that year before any Income Tax relief is obtained in respect of your VCT investment is £5,000 that is the relief you will receive. The difference of £1,000 cannot be set off against the Income Tax liability of any other year.

The VCT will provide you with a certificate when you are issued with qualifying shares. Your tax office may ask you for this certificate when you claim Income Tax relief.

What are the Different Types of VCTs?

AIM VCT

AIM VCTs invest in new shares in companies that are quoted on the Alternative Investment Market (AIM) Index. AIM is the London Stock Exchange’s international market for smaller growing companies. A wide range of businesses including early stage, venture capital backed as well as more established companies join AIM seeking access to growth capital.

Only new shares can be bought by VCTs and only the smallest AIM-listed companies are likely to be permitted by VCT rules due the maximum size of enterprise that VCTs are allowed to invest in.

Generalist VCT

Generalist VCTs invest in a range of companies in different sectors and stages of investment. They tend to invest in unlisted companies, looking to make profits when these companies are floated or the shares can be sold to an acquiring company.

The objective is to support companies that have strong management and business models, that are in or entering an expansionary phase, and so can promise growth for their investors.

Specialist VCT

Specialist VCTs tend to invest in just one sector such as healthcare or technology, where the VCT manager has specialist expertise. Specialist VCTs are seen as a more risky investment but can potentially offer high returns.

If you would like further information on investment management products available to you, please contact the Willis Wealth Management team on 028 9032 9042 or complete our quick enquiry form.

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