Venture Capital Trust
VCT
What are they?
Venture Capital Trust (VCT)
were introduced by the UK Government in
1995 to encourage individuals to invest in UK
smaller companies. The Government achieved this by
offering VCT investors a series of very attractive
tax benefits.
As a result of these tax
benefits, the total invested between 1995 and 2006
was more than £2.9billion (Source:
PricewaterhouseCoopers LLP).
A Venture Capital Trusts is a
pooled fund investment vehicle designed to provide
investors with a way of investing in small UK
unquoted companies that would otherwise be difficult
to invest in directly.
The unquoted companies must be
‘qualifying’ companies in that they do not partake
in trades associated with land, property
development, financial investments, farming and
forestry.
A VCT is similar to an Investment
Trust in that it is a company quoted on the London
Stock Exchange (LSE). Investors buy shares in the VCT.
Who are they for?
VCT’s are aimed at investors who
may have large income tax liabilities who wish to
invest for the medium to long term and are prepared
to take some investment risk.
How do they work?
A VCT raises funds from investors
by issuing a prospectus for an offer for
subscription over a set time period. Once the issue
is closed, the shares are then issued on the London
Stock Exchange (LSE).
The Inland Revenue approves the
VCT ensuring that the VCT is investing at least 70%
of its assets in unquoted UK companies or companies
on the Alternative Investment Market (AIM) or Offex
markets.
The remaining 30% may be invested
in non-qualifying investments.
As an LSE listed company, the VCT
must have a Board of Directors who appoint a venture
capital manager that identifies, invests in and
manages a suitable portfolio. An investor can
invest in a VCT in two ways – either by taking up an
offer for subscription or by buying VCT shares on
the stock market.
The latter method does have some
tax implications detailed below.
Tax situation
Income tax relief is available to
VCT investors as follows:
- Income tax relief at 30% on investments up
to £200,000 per tax year. This means that the
the immediate effective return is over 42%.
- The investor will however need an income tax
liability in order to take advantage of this
relief.
Tax free dividends
Capital gains within a VCT are
usually distributed by the VCT managers in the form
of tax free dividends.
Furthermore investors will not be
liable to Capital Gains Tax (CGT) on gains arising
from disposal of the VCT shares.
Example: a client has £30,000
income tax liability. By investing £100,000 into a
VCT, the income tax liability can be minimised.
|
Gross
investment: |
|
£100,000 |
| Income tax relief @ 30%: |
|
£30,000 |
| Net cash investment: |
|
£70,000 |
Unlike pension schemes where
basic rate tax relief is provided at source, the VCT
investment is made gross with tax relief being
secured by a refund from Her Majesty's Revenue and
Customs (HMRC).
NB...The favourable tax treatment
currently available for VCTs might not continue in
the future. Whatever your financial advice requirements are,
you can be assured that Ashton Hoyle are well
positioned to provide an innovative answer and we
look forward to speaking to you on any financial
matter. Contact us now
to see how we can help. |
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