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WHAT ARE VCTs
Venture Capital Trusts (VCTs) are a
type of Investment Trust launched by
the government in 1995 to encourage
investment into small UK businesses.
Investors are shareholders in the
trust, which is a collective investment
overseen by an independent board and
run by an investment manager who
will invest in smaller UK companies on
behalf of the shareholders. They are
governed by regulations that define the
sorts of underlying investments they
can make and subject to the UK Listings
Authority rules.
There are attractive tax incentives and
investors can purchase up to £200,000
VCT shares per tax year. (Technically,
they could purchase more than this, but
they would not get the initial Income Tax
relief on purchases over this amount.)
They are one of three Tax Advantaged
Venture Capital Schemes that use tax
reliefs to encourage retail investors to
invest in smaller businesses. The other
two are the Enterprise Investment
Scheme (EIS) and Seed Enterprise
Investment Scheme (SEIS). As a rule
of thumb, VCTs are lower risk than EIS
investments, which in turn are lower
risk than SEIS investments. A VCT offers
access to a range of companies on a
pooled basis, whereas with EIS and SEIS
clients become a direct shareholder in
the underlying company.
TAX RELIEFS
There are three major tax reliefs:
Income Tax relief of 30%
Tax-free dividends
Tax-free capital gains
The Income Tax relief is clearly
attractive. A £10,000 investment would
knock £3,000 off the investor’s tax bill
and the relief is paid up front. The relief
can be claimed against both earned and
unearned income (for example, income
from a rental property).
There are some subtleties to note
though - it can only be offset against
the Income Tax bill - you can’t get
relief against tax you never paid
unfortunately! And some VCTs invest
net of charges. So to take a simplistic
example, if you pay £10,000 and only
£9,500 is invested after charges, this
is the amount that the relief can be
claimed on. Other VCTs pay charges out
of the VCT itself, so investors would get
the relief on the full £10,000 invested.
The Income Tax relief is only available
when purchasing primary issues of VCT
shares
It is not available on share purchases
made in the secondary market
The shares have to be held for a
minimum of five years, or HMRC will
claw back the Income Tax relief
VCT
EIS
SEIS
Risk
Relief
+
+
-
-
TAX RELIEFS
EIS VCT
INCOME
TAX RELIEF
30% 30%
MINIMUM
TERM
3
YEARS
5
YEARS
MAXIMUM
ANNUAL
INVESTMENT
ELIGIBLE
£1m
( plus
£1m carry
back)
£200,000
DIVIDENDS
TAXED
TAX
EXEMPT
GROWTH
TAX
EXEMPT
TAX
EXEMPT
CGT
DEFERRAL
YES
NO
LOSS RELIEF
YES
NO
IHT
RELIEF
100%
after
2 year
holding
Period
NO