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VCTs (Venture Capital Trusts) were introduced in 1995 in order to encourage individuals to invest money into smaller, higher risk companies. Since their inception, VCTs have raised £7.7 billion in funds and in 2017 alone the total sum raised was £745 million, a 30% increase on the previous year and the highest sum since 20131.
As we approach the end of the tax year, we set out in simple terms what a VCT is, what tax reliefs they provide and who they may be suited to.
What is a VCT?
VCTs are investment companies that are listed on the London Stock Exchange which invest in small UK companies with high potential for growth.
The type of companies that VCTs invest in are privately owned or trading on the AIM (Alternative Investment Market). They are innovative, bringing new and disruptive technologies or products to market.
Investment decisions on VCTs are made on the advice of regulated fund managers whose role it is to find companies that have potential for growth.
There are three types of VCTs
The majority of VCTs are considered ‘generalist’. They invest in unquoted companies (a company that isn’t listed on a stock exchange) in a range of different sectors which offer clients greater diversity in a fund than a Specialist VCT. The reduced reliance on a single sector generally means that the funds are less sensitive to the fluctuations of a particular market.
As with Generalist VCTs, Specialist VCTs should be considered a long-term investment. The difference is that a Specialist VCT focuses on one particular sector rather than offering a diverse sector spread. Specialist VCTs have no sector diversification and are therefore more sensitive to the fluctuations in that market, but they can offer stronger returns if the specific industry performs well.
AIM VCTs may also be generalist, but they invest predominantly in AIM-listed companies.
To facilitate investment in small UK businesses with a view to boosting economic growth, the government offers generous tax benefits as an incentive for individuals who choose to invest in VCTs; this is because the nature of the businesses mean they are higher-risk than investing in well-established, blue chip companies.
Income Tax Relief
When you invest in a VCT, you will be eligible to claim 30% income tax relief on your investment. Here’s how it works:
You invest £10,000 into a VCT. You are eligible to claim £3,000 (30% of your VCT investment) of income tax relief if you have paid or owe this much tax in the same tax year.
The maximum investment you can make in any year is £200,000 and therefore the maximum income tax relief you could claim is £60,000 in one year. In order to maintain the relief, you must hold the investment for at least five years. If you were to exit a VCT before this point, you would be required to pay back the income tax relief you claimed.
Tax Free Growth
If your investment produces a return, any growth will not accrue tax.
Tax Free Income
Any dividends that are paid to you from your VCT will be tax-free.
Who could benefit?
VCT investing is suitable for UK resident taxpayers who can tolerate a higher degree of risk and are capable of holding their shares for more than five years.
An individual who is interested in diversifying their portfolio and would like to reduce their income tax liability could be well suited to VCT investment.
If a person is close to their lifetime allowance, or has a fully funded pension, VCTs may also be a good alternative option.
What are the risks?
Whilst the potential returns of a VCT investment can be appealing, it is important to recognise that like any investment, there are risks involved. Tax rules are subject to change, which could affect the tax relief provided by VCTs.
Your capital is at risk, which means you may not get back as much as you put in.
VCTs should be considered longer term investments and may be higher risk and more difficult to realise than other securities listed on the London Stock Exchange. This is because the types of companies that VCTs invest in are early stage, innovative companies that are largely unlisted, so their value can be uncertain, and they will not have a readily available market price. In addition, the secondary market for shares in VCTs is limited and as a result the shares usually trade at a discount to net asset value. Some VCTs do, however, offer a ‘buy-back’ facility at certain times of the year.
Foresight’s VCT offering
An individual should take professional advice when deciding to invest in a VCT, considering their needs, investment goals and risk appetite.
To find out more about Foresight’s VCT offering, you can download a summary here.
This post has been produced by Foresight Capital LLP, which is authorised by the Financial Conduct Authority. Capital is at risk. The value of an investment can fall as well as rise. Investments in smaller unquoted companies are higher risk than investments in larger quoted companies. Investors may not get back the full amount they invest.
Past performance is not a reliable indicator of future results.
We recommend investors seek professional advice before deciding to invest. Foresight is not able to offer investment advice.
HM Revenue and Customers, Dec 2018, Venture Capital Trust Statistics,