SJP - VCT Guide

16 RISKS AND REWARDS 17 RISKS AND REWARDS VCTs that meet all the qualifying conditions are approved by the Venture Capital Relief Team on behalf of HMRC. VCTs are either fully approved (once established) or provisionally approved (for new VCTs) by HMRC. Loss of VCT approval is extremely rare, if not unheard of, but for completeness, if a VCT loses its approval: 1. HMRC may claw back any income tax relief if the VCT loses its approval within five years of the share issue, or at any time if the VCT was only provisionally approved; 2. All dividends paid by a VCT with provisional approval will be treated as if they were never exempt from income tax, and HMRC may claw back the tax due; 3. Any VCT shares whose disposal would ordinarily have been exempt from CGT will lose that exemption. There is more on the various conditions that VCTs have to meet in the ’Rules for VCTs’ section on page 18. Regulatory risk The government is determined to make sure this country continues to be the best place for people to build up an idea. New and innovative companies and technologies are vital to our country’s long-term financial health. These companies improve competition and in time will provide new jobs. We want to make clear that tax advantage money should be focussed on areas where capital (raising) issues are severest. DONALD STARK, HEAD OF INVESTMENT TAX AT HM TREASURY There are some notable differences in how the tax reliefs available with VCTs compare to those available through the EIS (the other major tax- advantaged venture capital scheme in the UK). • Income tax relief is subject to a five- year minimum holding period with VCTs, compared to three years with EIS (although the investment horizon is likely to be five years or more). • Unlike EIS, VCT investment cannot be carried back to previous tax years. • There is no loss relief, CGT deferral relief or IHT relief with VCTs. • VCTs can pay dividends tax free, EIS cannot. • Both VCTs and EIS investments are not subject to CGT on capital gains made, (subject to certain conditions). With a VCT, income tax relief is claimed at the point at which the shares are issued by the VCT. This is also treated as the starting point for the minimum holding period. This is different from an “unapproved” EIS fund (which comprise most EIS funds), where the reliefs and associated minimum holding periods apply each time shares are issued by the underlying investee companies. Comparison: EIS and VCT tax reliefs VCT AND EIS COMPARISON VCT 1 EIS portfolio/fund 1 INCOME TAX RELIEF 30% 30% MINIMUM TERM 5 years 3 years LIKELY INVESTMENT HORIZON 5 - 10 years 5 - 10 years MAXIMUM ANNUAL INVESTMENT ELIGIBLE £200,000 £1m plus £1m carry back* DIVIDENDS Tax exempt Taxed CAPITAL GAINS Tax exempt Tax exempt CGT DEFERRAL No Yes LOSS RELIEF No Yes IHT RELIEF No 100% after 2 year holding period DIVERSIFICATION 30 - 60 companies 4 - 15 companies LIQUIDITY Up to 20% (for accounting periods ending on or after 6 April 2019), of the VCT’s assets may be held in cash** There is no large-scale active secondary market*** in unquoted shares TARGET DEPLOYMENT TIMELINE FOR FULL INVESTOR SUBSCRIPTION 1 - 6 months unless there are fixed allotment dates for each tax year 12 - 24 months 1 Subject to conditions being met. * From 6 April 2018, maximum £2m where at least £1m is invested in knowledge-intensive companies. ** VCT managers do often offer share buyback schemes to enable divestment, but these are usually at a discount to the underlying asset value and are not guaranteed. VCTs’ shares are not widely traded and they usually trade at a discount to their Net Asset Value (NAV). *** EIS managers do not offer buy-backs. Investors should regard themselves as locked in to the shares until the underlying company lists on a recognised stock exchange, achieves a trade sale, or the company is wound up. AIM listed EIS-qualifying shares have the potential for faster disposal.