Venture Capital Trusts

What is a VCT?

VCTs are listed companies which pool investor’s money to fund a series of small businesses with high potential for growth. The government introduced them in 1995 as an easy way for investors to access these small companies, and encourage investment in UK entrepreneurs.

There are rules which govern the different types of VCT schemes, and there are risks – which is why the government offers generous tax incentives to compensate investors for the risk they take on.

How do I benefit from a VCT investment?

To encourage people to invest in these early-stage UK companies, the government offers the following tax benefits to investors:
• 30% Income tax relief on the first £200,000 invested in a newly issued VCT each year
• No income tax on any dividends from VCT shares
• No capital gains tax (CGT) when you sell your VCT shares

So, if you invest £10,000 in a new VCT, you could receive £3,000 tax relief (as long as you owe or have paid sufficient tax in that tax year.) But, it’s worth noting that this tax relief is only available for investment on new VCT shares, you can only receive as much tax as you owe (or have paid) in that tax year – and if you sell your shares within five years – you’ll have to give this back.

What risks are associated with VCTs?

There is always the chance that a small business could fail. That said, the VCTs in which one can invest are unlikely to be focusing on one-man operations. Eligible ‘smaller’ businesses joining a VCT scheme can be up to seven years old, with 250 full-time staff and £15,000,000 in growth assets. Each individual VCT will have its own manager, who will hand-pick each venture.

How do you get your money back?

When it’s time to sell VCT shares, most policies will allow shareholders to sell their shares back to the Trust– but this will be at a discounted price outlined within the policy (often 5%). Shareholders can sell their shares to other investors but because investors will not receive the 30% upfront income tax relief on these ‘second-hand’ shares, shareholders may be offered a lower price than the full value of the shares.

If you are interested in exploring how VCT can be used in conjunction with pension planning read here: VCTs & Pensions