What is a VCT, and should you invest in one?

If you’re looking to expand and diversify your portfolio, supplement a pension, or benefit from government tax incentives, you might wish to consider Venture Capital Trusts (VCTs).

What is a VCT?

VCTs are listed companies which pool investor’s money to fund a series of small businesses with high potential for growth. The government introduced them in 1995 as an easy way for investors to access these small companies, and encourage investment in UK entrepreneurs.

There are rules which govern the different types of VCT schemes, and there are risks – which is why the government offers generous tax incentives to compensate investors for the risk they take on.

What are the benefits of investing in a VCT?

To encourage people to invest in these early-stage UK companies, the government offers the following tax benefits to investors:

• 30% Income tax relief on the first £200,000 invested in a newly issued VCT each year
• No income tax on any dividends from VCT shares
• No capital gains tax (CGT) when you sell your VCT shares

So, if you invest £10,000 in a new VCT, you could receive £3,000 tax relief (as long as you owe or have paid sufficient tax in that tax year.) But, it’s worth noting that this tax relief is only available for investment on new VCT shares, you can only receive as much tax as you owe (or have paid) in that tax year – and if you sell your shares within five years – you’ll have to give this back.

What are the risks?

There’s always the chance that the small businesses could fail – but they’re rarely one-man operations. In fact, eligible ‘smaller’ businesses wishing to join a VCT scheme can be up to seven years old, with 250 full-time staff and £15,000,000 in growth assets. The VCT will have its own manager, who hand-picks each venture.

When it’s time to sell VCT shares, most policies will allow shareholders to sell their shares back to the Trust– but this will be at a discounted price outlined within the policy (often 5%). Shareholders can sell their shares to other investors but because investors will not receive the 30% upfront income tax relief on these ‘second-hand’ shares, shareholders may be offered a lower price than the full value of the shares.

You should not view any of the information contained within this article as advice.