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 quote 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 is 2 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.

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.