Venture Capital Trusts (VCTs)

Fund managers raise capital annually in order to invest in UK-based, smaller companies to help them grow and develop. Each VCT invests in a range of businesses at different stages of development, often following a specific theme. The aim is to achieve company growth and pay regular dividends. A typical VCT holds around 60–120 underlying investments.

Due to the nature of VCT investments in smaller UK companies, there’s a higher risk attached of underlying companies failing to grow. However, VCT fund managers specialise in finding early-stage businesses with strong growth potential that may be sold for more than their original purchase price.

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.

The main qualifying conditions for a VCT company to be eligible for relief are as follows:

• A VCT must not be a close company, meaning it cannot be controlled by its directors or by five or fewer people and their associates who together hold more than half the voting share.
• 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 (ten years for a ‘knowledge intensive’ 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.
• Since 6 April 2019, at least 80% of a VCT’s investments must be in qualifying shares or securities . These should be in private or AIM-listed companies, with the money used for their 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 must have fewer than 250 full-time employees.

No, VCTs are not exempt from Inheritance Tax.

Unfortunately, VCTs do not qualify for Business Relief (formerly Business Property Relief). However, Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) do.

VCTs are not regulated, therefore you should always speak to a financial adviser before considering these products. At Mattioli Woods, we can provide expert advice to help you understand the risks and opportunities.

No. When your Venture Capital Trust 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.

No. 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.

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

VCTs and EIS are both UK investment schemes that offer tax incentives, but they differ in how you invest and the risks involved. Venture Capital Trusts are listed companies that hold a diversified portfolio of smaller businesses and can pay dividends. Enterprise Investment Scheme investments are made directly into individual private companies, offering potentially higher growth but higher risk. Tax benefits also differ slightly between the two schemes.