Venture Capital Trusts

Venture Capital Trusts were created in 1995 to boost investment in smaller unquoted companies, There is now a good length of track record with a wide disparity in returns. The tax incentives are generous and of particular interest for investors liable to higher rates of Income Tax who are seeking an income.

A VCT is a company, broadly similar to an investment trust, which has been approved by HMRC and is listed on the London Stock Exchange. Under the VCT scheme, VCTs and their investors enjoy certain tax reliefs (summarised below).

The VCT scheme has been designed to encourage investment in small unquoted companies. Individuals invest by holding shares in a VCT. The VCT invests in a spread of small unquoted companies, enabling investors to spread their risk, just as they do by holding shares in an ordinary investment trust company. There are different reliefs and restrictions depending on whether the investor subscribes for new shares (which is bty far the most common approach) or buys exisitng shares in the market.

Investment Strategy

The investment approach depends partly on how the VCT plans to distribute returns to investors. There are two options:

  • Evergreen: VCTs that plan to exist indefinitely and generate dividend income. Exit will only be possible by selling shares in the market. This type of VCT will largely in invest in ‘real’ businesses where the intention is to profit from a successful realisation in the future and/or a rising stream of dividends.
  • Limited life: VCTs that intend to liquidate their portfolios after five years and return the proceeds to shareholders. These VCTs will invest in enterprises which are designed to be self-liquidating, typically projects with a limited time period.

Maximum investment:

£200,000 per tax year.

Pros:

  • 30% Initial tax credit
  • Tax free dividends
  • No CGT on gains
  • Highly regulated

Cons:

  • High running costs
  • 5 year minimum holding period
  • Shares usually trade at a discount to net assets

Useful sites

The Money Advice Service
AIC

Disclaimer

The information set out above is included for information purposes only and is not an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any security, product, service or investment. Any opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. All information is current as of the date of publication, subject to change without notice, and may become outdated over time.
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