Venture Capital Trusts

Venture Capital Trusts, commonly referred to as VCTs, were introduced in the 1995 Finance Act to encourage private investments in the small company sector by offering tax relief in return for a five year investment commitment. A VCT is a quoted vehicle, with an active investment manager and a spread of investments in smaller unlisted UK companies and companies whose shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange. Whilst looking to provide capital growth, VCTs differ from most collective investments in that the manager can have an involvement in the running of the company, working closely with the firm’s management team.

Venture Capital Trusts explained

The companies in which a VCT invests must be unquoted for VCT purposes. This means that none of its shares, stocks, debentures or other securities can be listed on a recognised stock exchange (AIM and OFEX listed shares are permissable). VCTs invest in small companies that have assets of no more than £7m with the aim of growing the companies and selling them or launching them on the stock market. Small, younger, companies may not be generating sufficient working capital and so turn to VCT management companies as a way of raising finance. Because the firms are small, there is a high level of risk compared to investing in a larger, established business, although no VCT has gone bust since they were launched. There are also concerns about the liquidity of the market, with some investors unable to sell their investment. Investors only receive tax relief on new issues in VCTs, not through second-hand VCT shares.

There are two types of tax relief available to Venture Capital Trust shareholders:

Dividend income, derived from the underlying investments of the Venture Capital Trust Portfolio, is completely free of tax.

Exemption from tax on any capital gains made on the VCT investment itself. When you eventually dispose of a VCT any gain will be completely exempt from Capital Gains Tax provided the VCT was an approved VCT at the time the shares were bought and at the time they were disposed, and the investor is aged 18 or more.

Venture Capital Trusts also offer tax relief on the individual investor:

Income tax relief

Income tax relief is available at the rate of 30% of the amount subscribed for shares issued in the tax year 2008/09 and onwards. This applies to a maximum investment amount of £200,000, provided the shares are held for at least five years. This rebate is only available when you invest in a new issue of shares in a VCT or a top-up.

If the VCT shares are sold within the five year period, income tax relief is clawed back.

VCTs are not suitable for all and should only be considered by investors with significant investment portfolios who are comfortable with the risks of investing in smaller companies, and who can afford to take a long-term view. It is important to highlight that the time horizon on these vehicles should be viewed as long term (5-10 years) and the value of the investment and any income derived from it may fall as well as rise and is not guaranteed. VCTs are by their nature illiquid and therefore might not be easily sold either during the five year period or after that.

VCT's Explained

RISK WARNING:

You should not invest unless you have read and fully understood the EIS share prospectus; are aware of the risks involved; are prepared to hold for the long term and can afford to risk making a loss. In some circumstances unquoted (including AIM, Ofex) shares may be considered illiquid and you have difficulty in selling these investments at a reasonable price, if at all. You should carefully consider whether such investments are suitable for you. Should you have any doubts about the suitability of this investment please consult with a professional adviser in accordance with Financial Services and Markets Act 2000.