Venture capital trusts (VCTs)

A venture capital trust (VCT) is an investment company that has been approved by HMRC, is quoted on a regulated market and invests at least 70% of its assets in small unquoted companies (those that would qualify under the EIS).

Conditions

Aside from the type of companies it can invest in and the percentage of its asset portfolio that must be invested, there are other conditions for VCTs:

  • 85% of income must be distributed in the form of dividend
  • it must be able to demonstrate that its investments are spread
  • no one investment can account for more than 15% of the whole portfolio.

Changes to VCT, EIS and SEIS schemes require that investments are required to satisfy the new ‘risk to capital' test at the point of investment.

Income tax relief

If an individual subscribes for new ordinary VCT shares up to the value of £200,000 in a tax year they will qualify for 30% income tax relief.

Any dividend received in respect of ordinary shares in a VCT is exempt from income tax if the individual receiving it is over 18.

The shares must be held for at least 5 years to qualify for these tax benefits.

Gains

Gains made on the disposal of ordinary shares in a VCT are not considered to be chargeable gains. No capital gains tax relief is available for losses incurred.

The shares must be held for at least 5 years to qualify for this tax benefit.

Tax rules and allowances are not guaranteed and may change in the future. VCT investments can be high risk and are not suitable for most investors. Specialist advice is essential to establish both eligibility and suitability for such investments. Whilst VCT investments may have significant tax benefits, the value of investments can fall as well as rise and you may not get back all, or even any, of the amount you originally invested.

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