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Venture Capital Trusts (VCTs)

Invest up to £100,000 each tax year
Claim up to 30% income tax relief*
Tax free dividends
Invest in unquoted companies

Important: Venture Capital Trusts (VCTs)

VCTs invest in small, early-stage and unlisted companies and are considered high-risk investments. The value and income from VCTs can rise and fall and you may get back less than you put in. Past performance is not a guide to the future. Tax treatment depends on an individual’s circumstances and can change. Investment decisions should only be made after receiving professional advice. Contact us today to speak to one of our advisers about your investment planning.

What are VCTs?

Venture Capital Trusts (VCTs) aim to encourage investment in unquoted companies/shares by way of providing tax relief to investors.

The VCTs are quoted on the London Stock Exchange and typically invest in unquoted shares, for example in the new shares of privately owned companies and the new shares of companies traded on the Alternative Investment Market (AIM).

Why should you have VCTs?

Thanks to the initial tax benefits VCTs can provide, as well as tax-free dividends and tax-free disposals, VCTs can be considered as part of a diversified, wealth management strategy.

VCTs also represent a different type of investment asset class which is not usually built into a portfolio, allowing you to derive returns from a diversified portfolio.

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What are the risks of investing in VCTs?

VCTs are high-risk investments and there may be no market for the shares should you wish to dispose of them. In many cases the only buyer may be the VCT itself.
It is likely therefore, that VCT shares will trade at a discount to the Net Asset Value (NAV) of the Trust and you may find it difficult to realise the true value of the investment.
The value of shares in VCTs and the income derived from them can go down as well as up and investors may not get back the money originally invested.
Income tax relief is granted at the rate of up to 30% on subscriptions for new VCT shares up to an invested amount of £200,000 per tax year (maximum income tax relief is such amount as would reduce the investor’s income tax liability in the relevant tax year to zero).
However, HM Revenue & Customs will reclaim this tax relief if the shares are not held for at least five years or if the VCT is deemed by them to lose its qualifying status.
VCTs typically invest in unquoted shares, for example in the new shares of privately owned companies and the new shares of companies traded on the Alternative Investment Market (AIM) and as such should be considered as high-risk investments.

You can invest up to £100,000 in VCTs within each tax year.

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What are the tax benefits of a VCT?

The tax relief position on a VCT investment, based upon current tax legislation, is as follows:

*Income tax relief: Up to 30% income tax relief on the amount you invest in each tax year, as long as you hold the shares for at least five years. The amount you can claim tax relief on cannot exceed £200,000 in each tax year, and the tax relief you get cannot exceed the amount of income tax you are expected to pay. The tax relief must be claimed for the tax year in which the investment is made.

Frequently Asked Questions

How do VCTs work?

Fund managers raise capital annually in order to invest in UK-based, smaller companies to help them grow and develop. Each VCT will have its own underlying companies at different stages of the business’s life cycle. Often, VCTs will have a theme or thematic approach to the companies that they hold and manage. The VCT fund managers target high-growth as well as regular dividend yields.

VCTs vary in size but classically you will receive between 60-120 underlying investments.

Are VCTs a good investment?

Due to the nature of VCT investments in smaller UK companies, there’s a higher risk attached to some underlying companies failing to grow. However, VCT fund managers tend to specialise in identifying early stage businesses with high-growth potential that can have the ability to be sold for a multiple of the purchase value.

VCT fund managers often sit on the Board of the underlying companies to provide experience and guidance.

When considering the initial tax benefits, tax-free dividends and tax-free disposals, VCTs certainly have a place as part of a diversified, wealth management strategy.

What are the main conditions for VCT relief?

The main conditions for gaining relief are as follows:

A VCT must not be a close company (a company in which the directors control more than half the voting shares, or where such control is exercised by five or and their associates).
VCT shares must be listed on a regulated market.
In general, the VCT should not invest in a company whose trade is more than seven years old (10 years for a ‘knowledge intensiveʼ company).
The VCT must derive its income wholly or mainly from shares and securities.
And not retain more than 15% of the income from shares and securities.
At least 80% (since 6 April 2019) by value of its investments must be in qualifying holdings of shares or securities throughout the accounting period. These companies should be privately owned or AIM listed with investment used for the companyʼs organic growth and development.
No one holding can represent more than 15% of the value of the VCT at the time of investment, so the minimum holdings within a VCT must be at least seven.

A company in which a VCT invests must not have gross assets valued in excess of £15 million and have fewer than 250 full time employees.

Are VCTs exempt from inheritance tax (IHT)?

No, VCTs are not exempt from inheritance tax.

Do VCTs qualify for business property relief (BPR)?

Unfortunately, VCTs do not qualify for business property relief however, Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) do.

Are VCTs regulated?

VCTs are not regulated, therefore you should always speak to a financial adviser before considering these products.

Are dividends from VCTs taxable?

When your VCT pays dividends to you, there is no tax to pay, and you will not have to declare them on your tax return or self-assessment form.

Do you have to pay capital gains tax on VCTs?

If the value of your shares has increased while you have held them, you will not be liable for capital gains tax when you sell them; the growth is tax free.

Are VCTs covered by the Financial Services Compensation Scheme (FSCS)?

No, VCTs are not covered by the FSCS. They are considered high risk investments by the Financial Conduct Authority (FCA).

All statements concerning the tax treatment of this investment and its benefits are based on our understanding of current tax law and HM Revenue & Customsʼ practice. Levels and bases of tax relief are subject to change.

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