Venture Capital Trusts (VCTs)
Venture Capital Trusts
Venture Capital Trusts (VCTs) offer individuals the opportunity to invest in smaller, less established and growing companies.
Working in a similar way to investment trusts, VCTs raise money from individual investors who wish to invest in a company or portfolio of companies. Investments are made into a pooled fund, thereby reducing risk.
It’s important to remember that VCT shares are not liquid even when registered on the London Stock Exchange. The value of shares and income from them may go down as well as up and you may not get back the amount you originally invested.
The main advantage of VCTs are the tax benefits. They have a 30% income tax rebate on the initial investment with no tax to pay on income or gains from the trust in the hands of the investor. As a UK resident, you can invest up to £200,000 per annum, providing you hold the investment for five years.
The relief detailed below applies only to individuals (not trustees, companies or other types of investor):
- Income tax relief is available within limits (maximum of 30% of the investment amount of up to £200,000 per tax year (i.e. £60,000 tax relief), or the investor’s actual income tax liability for the tax year (if less). This relief is available on the purchase of new ordinary shares only (unlike the reliefs below).
- No capital gains tax on disposal for shares acquired within the £200,000 investment limit (this applies to new ordinary shares or those purchased second-hand, for example, through the Stock Exchange).
- Dividends are exempt from income tax (except for the 10% non-reclaimable tax credit) – however, as dividends are likely to be low there should be a requirement for capital growth. This relief also applies to new ordinary shares or those purchased second-hand.
There are a number of conditions that a company must satisfy in order for HMRC to approve it as a VCT.
- At least 70% of the investment by value must be in qualifying unlisted trading companies (Qualifying Investments).
- This includes companies listed on the Alternative Investment Market (AIM).The shares or securities which meet the conditions of the scheme and which were issued to the company must continue to be held by it.
- From 6 April 2007, any money held by a VCT will be treated as an investment for the purpose of these tests. This 70% requirement means that it is possible for up to 30% of assets to be “blue chip” shareholdings.
- No more than 15% of the fund must be invested in any single company or group.
- At least 70% of the VCT’s qualifying investments by value must be in new ordinary shares in qualifying companies.
- This can include those with certain preferential rights.
- At least 10% of the holding in each company must be ordinary shares.
- The balance of the investments in qualifying companies can be in other shares or debt, such as debentures or other fixed or variable interest stock.
- The VCT must not have retained more than 15 percent of the income derived in the accounting period from shares or securities.
- In meeting these limits, a VCT cannot invest more than £1 million in total each year in any single qualifying unlisted trading company, the gross assets of which must not be more than £15 million before the investment and £16 million immediately after.
- These increased figures apply from 6th April 2012. Prior to that date, the figures were £7 million and £8 million respectively.
- The company must satisfy a number of other conditions broadly similar to Enterprise Investment Scheme (EIS) companies.
- HMRC will be able to give provisional approval to a VCT if it is satisfied that the conditions will be fulfilled within specified time limits.
- VCTs will initially have up to three years from the date of each share issue to meet both the 70% unlisted trading company and the 70% ordinary share requirements.
- A company no longer needs to have a qualifying trade carried out wholly or mainly in the UK but it is necessary for it to have a ‘permanent establishment in the UK’.
VCTs are high risk and extremely specialised investments, which is why we recommend seeking professional financial advice before making any decisions. Our expert team at Vintage Wealth Management will offer you further insight into how VCTs work and the benefits available to you to help you make an informed choice.