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. A VCT is a quoted vehicle, with an active investment manager and a spread of investments. 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. It is possible for ethical investors to subscribe to venture capital trusts investing in renewable energy, such as wind farms.

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. Companies whose shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange or on OFEX are unquoted companies. 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. 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.

Income tax reliefs

• Tax free dividends, which include both income derived from the underlying investments, and from capital gains realised inside the VCT portfolio.
  
• Income tax relief' at the rate of 30% of the amount subscribed for shares issued in the tax year 2006/07 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.

Capital gains tax reliefs

• 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.

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.