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 Venture capital trusts (VCTs) are very attractive from a tax point of view but they are a higher risk investment.
VCT's are primarily companies that are quoted on the stock exchange which invest mainly in unquoted companies and start-ups businesses. The VCT allows private investors to invest in those smaller companies that are in need of financial backing. It is backed by the Government as a way of helping Britain to be more entrepreneurial.
As the carrot for investing in these high risk businesses, you receive 30% tax relief (was 40% for 2005/06) on the investment made as long as the investment is for 5 years (previously 3 years for 2005/06). As a result every £10,000 you invest will only cost you £7,000 because of the tax relief.
In addition there is no income tax on dividends received nor capital gains tax when you come to sell the investment.
Although some companies may do very well, others never make it. However, some VCTs will invest in more established companies.
The Rules
These are the main rules...
- The VCT has to have 70% of its money in qualifying holdings, within three years of launch. These are basically trading companies with asset-backed or financial operations excluded.
- The balance can go into gilts or blue chip shares which can help reduce the overall risk of the VCT.
- 30% of the holdings must be in ordinary shares, which do not carry preferential rights to dividends or assets on a winding up.
- The VCT can invest up to £1m in a qualifying company, but this stake cannot be more than 15% of the trust's assets.
- A VCT can invest in shares quoted on the Alternative Investment Market (AIM), however, which can also help to lower the risk.
In addition, from 6 April 2007...
- The company must have fewer than 50 full time employees;
- The company must not have raised more than £2million under EIS, VCT or Corporate Venturing Schemes in the previous 12 months.
Making the Investment
You usually need to be making a minimum of investment of around £5,000.
Whilst there is no limit to the amount you can invest, you only receive tax relief on the first £200,000.
Because the trust is quoted on the stock exchange it is possible to buy and sell at any time. However, when you do so, you lose the up-front tax relief if you sell within three years and the purchaser does not get any tax relief on their purchase. As a result the price you get if you sell may not be very high.
How We Can Help You
We can advise you on the tax treatment of Venture Capital Trust investments. This is a complex area and expert advice is essential.
Got a Question?
If you have any queries on any of the above, please ask a question
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