VCT guide

12 RISKS AND REWARDS 13 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, 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 15. Regulatory risk VCT fundraising is crucial to the UK’s younger companies, as they will benefit from the VCT investment and expertise they need to grow. VCT- backed businesses deliver vital economic, social and environmental benefits, with jobs more than doubling after VCT investment. IAN SAYERS, CHIEF EXECUTIVE, ASSOCIATION OF INVESTMENT COMPANIES There are some notable differences in how the tax reliefs available with VCTs compare to those available through 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. In an EIS company investment, the minimum holding period starts when the shares are subscribed for and income tax relief can be claimed as soon as the company has issued an EIS3 certificate to the investor. 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.