Venture Capital Trust (VCT)

The Government introduced the Venture Capital Trust (VCT) Scheme in 1995 to encourage people to invest in smaller companies whose shares and securities are not listed on the main stock exchange with the aim of making capital returns, VCTs are themselves listed companies and are run by a fund manager.

There are very strict rules on how VCTs can invest the pooled funds which in turn provide a number of tax advantages for investors.

In order to receive the various tax reliefs, a VCT must be approved by HMRC. Sometimes a new VCT will not meet all the necessary conditions at outset and is given a specific time period in which to comply with the conditions. If this doesn’t happen, approval will be withdrawn and the tax reliefs clawed back. To retain approval, a VCT must continue to satisfy all the conditions during each later accounting period.

It is important that clients are aware that all tax reliefs will be clawed back if HMRC conditions are not met and approval is withdrawn within the five-year minimum period. Conditions include various requirements around what investments are made and gains are made from them on an annual basis.

The minimum contribution for these plans is normally £5,000, whilst the maximum, whilst still qualifying for income tax relief, is £200,000 per tax year.

Income tax relief is available at up to 30% on investments of up to £200,000 per tax year into newly issued shares, provided the shares are held for at least five years. Maximum income tax relief is any such amount as would reduce the investor’s income tax liability in the relevant tax year to zero.

Any capital gain on disposal is free of Capital Gains Tax. This exemption applies both to disposals made by the individuals originally subscribing for the shares at issue, and to investors who subsequently ‘buy in’ to VCTs quoted on the stock exchange.

Dividends received by the investor in a VCT are exempt from income tax. Again, this exemption applies both to disposals made by the individuals originally subscribing for the shares at issue, and to investors who subsequently ‘buy in’ to VCTs quoted on the stock exchange.

VCTs provide investors with certificates they may then use to claim income tax relief, made either immediately through PAYE adjustment or via completion of an annual tax return. They have a five-year qualifying period for the retention of full relief, and so the market for these investments is likely to be very illiquid, particularly in the early years, even though the shares will be listed.