VCT guide

9 8 RISKS AND REWARDS RISKS AND REWARDS VCT TAX RELIEFS INCOME TAX RELIEF TAX-FREE GROWTH (DISPOSAL RELIEF) TAX-FREE DIVIDENDS RATE OF RELIEF Up to 30% of the value of VCT shares subscribed for subject to permitted maximum 100% CGT exemption on disposals of VCT shares subject to permitted maximum Dividends are not subject to income tax subject to permitted maximum MINIMUM HOLDING PERIOD 5 years from the acquisition date of the shares in the VCT None None WINDOW OF OPPORTUNITY Relief can be claimed in the same year as the VCT shares are issued (unlike EIS, there is no carryback of a VCT subscription to a previous year) Subject to the VCT maintaining its qualifying status, no CGT to pay upon disposal if VCT shares are sold at a gain at any time Subject to the VCT maintaining its qualifying status, no income tax to pay on dividends paid from VCTs at any time RELIEF ON SECONDARY MARKET PURCHASES No Yes Yes MAXIMUM LIMIT £60,000 based on the annual permitted maximum of £200,000 worth of VCT share purchases in any tax year Gains on the disposal of ordinary shares in a VCT are not chargeable to CGT providing individuals aged 18 or over acquire ordinary VCT shares (whether by subscription for new shares or otherwise) within the annual permitted maximum Individuals aged 18 or over who acquire ordinary VCT shares (whether by subscription for new shares or otherwise) are exempt from income tax on dividends in respect of shares acquired within the permitted maximum FURTHER CONSIDERATIONS Maximum limit includes purchases of newly-issued shares and purchases in the secondary market Losses made on disposals of shares in VCTs cannot be used to offset gains made elsewhere when calculating an investor’s CGT liability Investors who receive exempt dividends do not have to show them on their tax returns COMPARISON OF RISKS WITH EIS It is worth comparing the risks of VCTs with EIS, the other major tax-advantaged venture capital scheme in the UK. The biggest difference is that VCTs generally operate a much bigger pool of investee companies, giving increased diversification and limiting investment risk. Rules when the permitted maximum is exceeded If the permitted maximum has been exceeded, when calculating which shares to claim reliefs on, it is NOT possible to choose which shares will be treated as acquired in excess of the permitted maximum (and therefore do not attract any reliefs). Instead, shares acquired earlier in the tax year count towards the permitted maximum first. The basic rules are: • The annual limit applies to all the taxpayer’s acquisitions in VCTs in the tax year concerned; • Shares acquired earlier in the tax year count towards the permitted maximum first; • Shares in different VCTs or different classes of ordinary share in the same VCT, acquired on the same day, are identified on a pro-rata basis. Secondly, as they are listed on a recognised exchange and hold more liquid assets than EIS funds (at least 20% of a VCT’s funds are not required to be invested in qualifying holdings; or 30% for accounting periods ending before 6 April 2019), they have increased liquidity. For these reasons, a VCT would usually be viewed as a less risky investment than an EIS company or fund. VCT Tax Reliefs Note: There is no income tax relief for VCT shares purchased on the secondary market. The permitted maximum Investors can purchase as many shares in VCTs as they like, in either new share issues or in the secondary market. However, there is a limit on how many of those shares will qualify for the tax reliefs. That limit is known as the permitted maximum and is currently set at £200,000 worth of VCT share purchases a year, including purchases of newly-issued shares and purchases in the secondary market. The permitted maximum was £100,000 up to the tax year 2003-04. Therefore, this limit needs to be used when calculating the value of tax reliefs relating to VCT shares purchased prior to April 2004. This means that it is perfectly possible to build up a portfolio of tax-advantaged VCT shares in excess of £200,000, provided that no more than £200,000 of shares were purchased in any single year.