Guide to VCT’s, an adventurous, highly tax efficient collective investment scheme.

Overview

A Venture Capital Trust is a highly tax efficient vehicle, but also relatively high risk. They are a type of collective investment aimed at providing funding to small companies who require a cash injection to forward their business. The VCT is traded on the the stock exchange, and can be bought and sold like any other shares. As the VCT is a collective investment, you will be buying shares in basket of small companies in which the VCT invests.

VCT’s have been around since 1995 when the Government decided to offer tax breaks to encourage people to invest in early-stage UK companies. They were a new idea of tax-incentivised investment, before the idea of ISA’s were ever adopted. The performance since this time has been variable, with some doing very well, whilst others had an awful track record. However, now they are seen as well-managed credible investments.

There are three general types :

  • Generalist
  • Alternative Investment Market
  • Specialist sectors (e.g. technology)

Some VCT’s called ‘planned exit’, have a tie-in period during which you can not withdraw your money, whereas ‘evergreen’ VCT’s have no minimum investment period. The former is cheaper than the latter in terms of fees.

Tax benefits

The most up-to-date tax relief information, and full terms and conditions, can be found on the Government website

Here’s an overview, correct to our knowledge at the time of writing :

  • Investors receive 30% income tax relief on any contributions to the VCT (when shares are held for 5 years)
  • There is no Capital Gains Tax (CGT) on investment returns
  • Income earned from the VCT is exempt fro income tax

Last year the Treasury implemented new legislation to ensure VCT managers are investing in the smaller startups (more risky investments), as many had been trying to reduce risk and investing in more established companies. The idea of a VCT has always been to inject capital in startup companies, to encourage new business growth.

It is important to note that you can only claim income tax relief against the income tax you need to pay in the UK, and it must be done in the tax year you invest. So to get the full benefit of the tax relief, you will likely need to be a high rate tax payer. If you do not pay income tax, then you will not be able to benefit from the relief. The investment also needs to be in newly issued shares (not secondary traded), to benefit from the tax relief.

Target market

Traditionally VCT’s have been aimed at high income earners, due to the tax advantages and relative high risk

However, these days it is possible to get involved starting at just a few £100. The key factor is what proportion of your income you place into something that is likely to be higher risk than your other investments. As long as you are contributing a relatively small amount, that does not affect the risk profile of your total investment profile, then VCT’s really are open to anyone. It is also important to remember you will not have access to the money for 5 years, so it must be cash that is disposable, and will not be required for day-to-day living.

An example VCT listed on the London Stock Exchange, can be found here , as can be seen (at the time of writing) the VCT has lost money over the  past five years. It is important to illustrate this, and to emphasis the benefit of diversification. When investing in something high risk, it is a good idea to diversify into different sectors, which may require purchasing a few different VCT’s.

Venture Capital Trusts are high risk investments, and the potential for loss (and gain) is high. Always seek professional financial advice before considering any investment. Ensure the overall risk profile of all of your investments remains within your attitude to risk. All information on this website is for educational use only, and no decisions should ever be based on its contents alone.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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