Venture Capital Trusts (VCTs)

What is a VCT?

A Venture Capital Trust (VCT) is similar to an investment trust. They’re listed on the London Stock Exchange and raise money from investors to invest in young, innovative companies that are unlisted and aren’t readily available to the public.

Smaller companies are a vital area of the UK economy. Without funding from venture capitalists, many companies we consider household names would never have been able to grow their businesses. It’s an exciting, dynamic area to invest in, but it also means they are by nature higher risk, as they are more likely to fail.

Profits are generally paid to VCT investors as dividends, which are the primary source of return. The VCT manager will also provide expertise to help their chosen firms expand and provide better returns for their investors. They normally look to sell their share of the business three to seven years after investing and reinvest the capital in the next opportunity.

To encourage investment in VCTs, the government offers generous tax incentives.

VCT shares are difficult to buy and sell – the market price may not reflect the value of the underlying investments. The value of the shares will rise and fall, income is not guaranteed and you could get back less than you invest.

What are the tax advantages of VCTs?

VCTs offer a number of tax advantages:

• Up to 30% income tax relief – up to £60,000
• Tax-free dividends
• No tax on capital gains

You can invest up to £200,000 each tax year and receive the tax benefits. For anything over this, you won’t be able to claim tax relief. You also need to pay that much in tax to claim it.

You need to hold the VCT shares for at least five years to keep the tax relief, otherwise you might need to repay it.

Only investments made in new issues of VCTs or a top-up qualify for the tax relief, not shares bought on the London Stock Exchange. You also can’t claim tax relief if you reinvest into a VCT you’ve sold within the last 6 months.

VCTs bought on the secondary market also still count towards the £200,000 allowance.

You’ll need to claim the tax relief on your self-assessment, but you don’t need to declare any dividends.

VCTs also need to maintain their qualifying status in order to keep all these tax benefits for their investors.

VCT and tax rules can change, and their benefits depend on your individual circumstances.

Who should consider investing in VCTs?

As the companies VCTs invest in are often new, very small companies which have a higher likelihood of failure, they are higher-risk investments.

They’re therefore aimed at wealthier, more sophisticated investors with a detailed understanding of investments, who can afford to take a long-term view. They should be held as a smaller part (under 10% of the portfolio) of a large, diversified portfolio. The Financial Conduct Authority (FCA) suggests a sophisticated investor is somebody with an annual income in excess of £100,000 or investable assets of more than £250,000.