What is a Venture Capital Trust?
FS Ventures advises clients on investing in Venture Capital Trust (VCT) portfolios, which aim to provide investors with tax-efficient access to a portfolio of companies with growth potential, targeting a tax-free dividend stream, through a combination of regular and special dividend payments.
VCTs can offer an attractive way to gain exposure to smaller companies that are not listed on the main market of the London Stock Exchange. However, investing in VCT-qualifying companies means VCTs are high-risk investments, and investors may not get back the full amount they invest.
Investing in a VCT means you are helping innovative smaller companies to create jobs, prosperity and economic growth. And, they offer a number of tax reliefs, too. Some companies that started off with funding from VCTs have grown to become household names in their own right. Some have achieved a listing on the London Stock Exchange and some have been sold to global brands, such as Microsoft, Amazon and Twitter, delivering excellent returns for VCT investors.
As well as providing investors with an easy way to access these small, often unlisted companies, VCTs offer a number of tax reliefs. VCTs offer up to 30% upfront Income Tax relief, tax-free dividends and an exemption from Capital Gains Tax on the shares should they rise in value. It’s important to understand that smaller companies can struggle in their early years, and some will not be successful. Therefore, the tax incentives are there to help compensate investors for the risk they take with their money.
VCT Tax Incentives
When you invest in new VCT shares, you are entitled to claim a number of tax incentives on investments up to £200,000 each year. These include:
- 30% upfront income tax relief*
You can claim up to 30% upfront Income Tax relief on the amount you invest, provided you keep your VCT shares for at least five years. So if you invest £10,000 in a VCT, £3,000 can be taken off your Income Tax bill, although the amount of Income Tax you claim cannot exceed the amount of Income Tax due.
- Tax-free dividends
If your VCT pays dividends, there is no tax to pay, and you won’t need to declare them on your tax return. Typically a VCT will target a 5% per annum regular yield, with any additional returns (such as via a sale of an underlying investee company) as a special dividend.
- Tax-free capital gains
If you decide to sell your VCT shares and you make a profit, the proceeds won’t be liable for Capital Gains Tax.
*Income Tax relief is only applicable for the current tax year.
- Your money is at risk
As with any investment, the value of shares can go down as well as up and investors may not get back the full amount invested. Investors should be aware that investment in smaller unlisted companies (including VCT qualifying companies) carries with it a high degree of inherent risk whether or not it is done via a diversified portfolio, regardless of any tax advantages which such an investment might carry and/or regardless of any steps taken to attempt to mitigate that risk. Investment in a VCT should therefore be considered a high risk investment.
- Long-term investment
You should be prepared to hold VCT shares for a minimum of five years. If you decide to sell your shares before then, you will be required to repay to HM Revenue & Customs (HMRC) any upfront Income Tax relief you’ve claimed.
- Tax Rules may change
The VCT tax benefits we’ve described are correct at the time of publishing. However, rates of tax, tax benefits and tax allowances do change. In addition, the tax benefits available to you through this investment depend on your own personal circumstances. To ensure that VCT money continues to support government policy objectives, HM Treasury can also change the definition of a VCT-qualifying investment in the future. This could impact the nature of new investments a VCT can make over time.
- Your shares may be difficult to sell
There isn’t an active market for VCT shares in the way there is for shares in bigger listed companies. This means that if you decide to sell your VCT shares, it may take time to find a buyer, or you may have to accept a price lower than the net asset value (NAV) of the VCT.
- The VCT’s qualifying status could end
There is no guarantee that VCTs will maintain their VCT status. If VCTs lose their qualifying status, tax advantages will be withdrawn from that point. Additionally, if a VCT loses its status within five years of your initial investment, you will be asked to repay any upfront Income Tax relief that you have already claimed.
The content of this webpage should not be construed as financial advice.
Any decision to invest should be made only on the basis of the relevant documentation for each investment. Past performance is not necessarily a guide to future performance. The value of an investment may go down as well as up and investors may not get back the full amount invested.
Investments in small unquoted companies carry an above-average level of risk. These investments are highly illiquid and as such, there may not be a readily available market to sell such an investment. You should always seek advice from your financial adviser before investing.