Venture Capital Trusts
Venture Capital Trusts (“VCT”) were introduced in autumn 1995 to encourage and increase a broader supply of equity capital investment into small companies in theUK.
VCT are investment trusts and the shares are quoted on the London Stock Exchange. These investments carry a high degree of investment risk and Her Majesty’s Revenue and Customs (HMRC) recognises that by giving income tax breaks to investors in newly issued VCT. By the end of the tax year 2012/13 just over £5 billion has been invested in VCT shares (source: HMRC).
As noted the Government through legislation actively encourages investment in VCT by offering a most attractive tax break package. For the 2014/15 tax year an investor in VCT shares qualifies for income tax relief at a rate of 30% of the amount invested subject to a maximum investment of £200,000. Of course the investor must have paid sufficient income tax that it is capable of being repaid.
As an added tax incentive VCT can distribute realised capital gains and investment income as a tax-free dividend and, on realisation, any capital gain is tax-free too. However, the shares must be held for at least five years to secure all the tax breaks.
Although the tax benefits are very attractive investors have to be mindful that investing in to a VCT carries a high degree of risk. For this reason investors need to be sure that they have the capacity to cope with any capital loss that might arise out of making such an investment.
The value of VCT investments can fall as well as rise and the investor may not receive back as much as was originally invested. Because of the risks attaching to such an investment and the specialised nature of the planning all investment should be made on the back of advice from a well qualified regulated person. VCT are most suitable for those individuals who can view such an investment as a long-term investment (five years minimum) and who have already a portfolio of investments to which this new asset class can be added without materially changing their overall risk profile.