Venture Capital Trusts
Venture Capital Trusts (VCT) are investment companies, listed on the London Stock Exchange, that aim to provide higher income earners with the opportunity to invest their money into smaller businesses in exchange for favourable tax breaks.
VCT’s look to collect money from individual investors/groups and re-invest the funds into smaller UK businesses in order to provide them with the necessary equity or ‘seed capital’ needed to fuel future investment and develop their business.
To encourage support for these smaller businesses, the UK government offer lavish tax benefits for investing in such schemes, which is also aimed at compensating investors for the considerably higher risk.
How do they work?
One of the major attractions is that the scheme allows investors to claim ‘upfront’ income tax relief at a rate of 30% on their investment, however this is on the basis that the investor will continue to hold the shares for at least 5 years.
You will receive up to 30% tax relief on the value of the investment up to a total of £200,000 per tax where this relief essentially acts as a tax credit, which is offset against any income tax liability arising in the year.
Like with most schemes, Venture capital Trusts may also pay out dividends to investors which also benefit from being tax-free (providing that they originate from the initial £200,000 investment).
Key Benefits
- Claim up to 30% income tax relief on the total amount invested in the scheme (providing that the shares purchased are held for at least 5 years since the date of purchase)
- When the VCT pays out dividends, no income tax falls due on these amounts and they are not required to be reported on a self-assessment return.
- Providing you hold the shares for 5 years, when you come to dispose of/sell these shares any gain is not liable to capital gains tax meaning that any growth or appreciation in share value is completely tax-free.
Conditions:
- You cannot invest more than £200,000 into a VCT scheme in any one tax year.
- If you decided to re-invest any dividends received from your investment, this counts towards the yearly £200,000 limit.
- You are entitled to the full income tax relief however you must intend to hold the shares in the VCT for at least 5 years – if you dispose of them before this date you will be required to repay a portion of the tax relief previously claimed
For example:
Katie has total employment income in the year of £60,000, dividend income of £10,000 and has invested a total of £12,500 into a qualifying VCT scheme.
| Employment | £60,000 |
| Dividend | £10,000 |
| Personal Allowance | (£12,500) |
| Taxable Income | £57,500 |
Tax Borne
| Basic rate (£37,500 x20%) | £7,500 |
| Higher rate (£10,000 x 40%) | £4,000 |
| Dividend allowance (£2,000 x 0%) | – |
| Dividend Higher rate (£8,000 x 32.5%) | £2,600 |
| £14,100 |
Qualifying VCT Investment
(£12,500 x 30%) (£3,750)
Total tax liability £10,350
What is the risk?
Quite honestly, the risk is considerably higher than other types of investment.
- Investments into VCT’s provides smaller companies with the required funding, however these companies are less established and have a higher chance of failing, ie. you’re more likely to lose your money.
- VCT shares are highly illiquid which means that these types of investments are extremely difficult to be sold on quickly and are not easily exchanged for cash without their values diminishing substantially.
- It ‘locks in’ investors for a minimum of five years if they wish to claim the full income tax relief.
- The favourable tax treatment of VCT’s is not set in stone and may change in future years.
- With all investments, the value may fall as much as it may rise!
- As well as Venture Capital Trusts being highly risky, they also tend to be very complex and will require investors to carefully research and read into any schemes before investing
No reliance should be placed on the content of this blog as the basis for any investment or other decision in connection with advice given to third parties and we recommend that specialist financial advice should be sought in connection to Venture Capital Trusts investments.
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