What are the tax benefits?
To encourage investment in an area vital to the economy, and in recognition of the risks and complexities of VCTs, the government offers certain tax benefits to VCT investors.
This makes them particularly attractive to those seeking to reduce their tax bill and generate income from their capital.
- 30% income tax relief for subscriptions in new VCT fund raisings
- Dividends paid by VCTs are free of tax
- No capital gains tax (CGT) to pay when you dispose of the VCT
The income tax relief means if you invest £10,000 you could either receive a cheque from the taxman for £3,000 or an adjustment in the income tax you pay. This applies to anyone, regardless of the rate of tax you currently pay.
You can invest up to £200,000 in VCTs each tax year and benefit from this tax relief. However, the maximum tax rebate is the amount of income tax you pay (see examples below).
Investors should only invest in VCTs on the basis of suitability rather than for the tax reasons. Tax rules can change and any benefits depend on individual circumstances.
Mr Smith invests £50,000 in a VCT. He will pay £20,000 in income tax this tax year, so he is entitled to the full 30% tax rebate of £15,000.
Mrs Smith invests £50,000 in a VCT. She will pay £10,000 in income tax this tax year, so the maximum tax rebate to which she is entitled is £10,000.
You must hold the shares for five years to keep the tax rebate. The rebate is only available when you invest in a new issue of shares in a VCT or a top-up, not on any VCTs you buy on the open market. However, VCTs bought on the secondary market count towards the £200,000 allowance for the tax year in which you buy them, despite the fact you don't get the income tax break. All tax treatments are subject to change and can be varied. If the VCT manager fails to meet the relevant investment rules the tax benefits could be withdrawn retrospectively.More information about VCTs