Venture Capital Trusts
Investments of up to £200,000 in Venture Capital Trusts (VCTs) offer significant tax incentives to investors including 30% income tax relief.
VCTs are quoted limited companies whose purpose is to invest shareholders’ funds in smaller unquoted trading companies, (including AIM listed stocks) having potential for growth, with a view to making profits. Most Venture Capital Trusts are run by investment managers and raise their funds from private investors.
What are the tax benefits?
Individuals may be able to secure a number of tax advantages from this sort of investment. However, from 6 April 2006, shares in VCTs must be held for at least five years (previously three years) to obtain all the potential tax benefits. In addition, the individual must be 18 years of age or more on the date of issue of the shares.
Income tax relief
Individuals who subscribe for new ordinary shares in a Venture Capital Trust are granted income tax relief at 30% on up to £200,000 pa subject to their having sufficient income tax payable to absorb the relief.
The tax relief is due when the shares are issued and can be given by an adjustment to the PAYE coding, or a claim in the tax return.
Tax relief will not be given on VCT investments where the shares were not acquired for bona fide commercial reasons.
Mr A has taxable income (after deducting his personal allowance) of £68,000 and invests £45,000 in a VCT share subscription in the 2008/09 tax year.
|Income tax on £68,000||20,240|
|VCT relief (£45,000 at 30%)||(13,500)|
|Reduced tax liability||£6,740|
No income tax on dividends
Dividends received by private investors from Venture Capital Trusts will not give rise to income tax liabilities.
No CGT on VCT investments
VCTs do not pay tax on realised investment gains and these gains can be distributed to investors as tax-free dividends. Conversely, there will be no tax relief for any losses incurred.
No CGT on disposal
Individuals will not be liable to Capital gains Tax on any profits arising from the disposal of VCT shares unless the Venture Capital Trust company is no longer a trust, ie they are taken over by a non VCT. CGT on gains that were deferred when investing in VCT shares before 6 April 2004 will still be due. (CGT deferral relief is no longer available on investments in Venture Capital Trust shares made on or after 6 April 2004).
What investments can a VCT make?
The VCT itself has to comply with investment conditions in order to qualify for the tax reliefs. These are as follows:
- A VCT must invest at least 70% of its funds in ‘qualifying holdings’. These holdings must be in unquoted companies that will carry on a ‘qualifying trade’ wholly or mainly in the UK. Some types of trade are specifically excluded
- At least 10% of the holding in each qualifying company must be in new ordinary shares with no preferential rights
- No more than £1 million can be invested each year in an unquoted trading company and any holding in a single company must not exceed 15% of the value of the Venture Capital Trust’s total investments at cost
- The VCT cannot invest in any company whose gross assets exceed £7 million immediately before the investment in it or £8 million afterwards (this is reduced from the limits of £15 million immediately before the investment and £16 million afterwards that applied prior to 6 April 2006)
- The Venture Capital Trust cannot retain more than 15% of the income derived from shares and securities
- The VCT cannot invest in a company or group of qualifying companies with 50 or more employees from 6 April 2007
- From 6 April 2007, the Venture Capital Trust cannot invest in a company that has raised more than £2 million in the past year through VCTs, the Enterprise Investment Scheme or the Corporate Venturing Scheme (however shares issued to VCTs on or before 5 April 2007, shares issued to VCTs for money raised on or before 5 April 2007 and shares issued under the Corporate Venturing Scheme and Enterprise Investment Scheme prior to 19 July 2007 are ignored for these purposes)
If the above conditions are not fulfilled at the relevant times HM Revenue and Customs (HMRC) has the power to withdraw approval and claw back the investor’s tax relief by means of an assessment.
What return would I get from a VCT?
VCTs may be geared either to capital growth or to income generation. The underlying investments of Venture Capital Trusts will vary significantly in their performance. It is in the nature of risk capital that some companies will fail while others will give substantial returns.
There can be no guarantees about the outcome of the investments and like all holdings on the stock market it will not be possible to predict share prices. VCTs are high-risk investments. The promise of tax reliefs should not override normal investment considerations.
What if I buy VCT shares on the market?
If you are not the original subscriber to the VCT shares (ie if you purchase the shares second-hand) the 30% income tax relief will not be available. However, subject to the £200,000 pa investment limit, any capital gains arising on sale of the VCT shares will be exempt and so tax relief will not be given for any losses arising on disposal. In addition, you would not be liable to income tax on dividends and any capital gains made by the Venture Capital Trust itself are still exempt.
How do I decide on a VCT investment?
Issues an investor will need to consider when deciding in which VCT, if any, to invest include:
- The investment experience of the Venture Capital Trust managers and their ability to utilise the funds raised
- Obtaining professional advice before investing
- The VCT share price may be discounted more than conventional investment trusts since buyers of Venture Capital Trusts shares on the market will not be entitled to all of the subscriber’s tax reliefs
- The fact that VCTs constitute a high risk investment. The benefit of tax reliefs should not outweigh the normal investment criteria
Can I claim other tax reliefs as well?
The tax regulations set out how some of the other tax reliefs for investment interact with VCTs. Broadly speaking VCT relief is given before Enterprise Investment Scheme relief (EIS).
Are there any other ways that I can lose my tax relief?
If you or an associate (eg a close relative) receives a loan from the VCT linked to the subscription for the shares, tax relief will be denied.
Who should I contact?
Professional advice should be sought before investing in a VCT. Independent Financial Advisers are well equipped to give independent financial advice on Venture Capital Trusts and other investments.
If you need guidance on Venture Capital Trusts or other matters please contact your Independent Financial Adviser who normally deals with your tax affairs in the first instance.