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Venture Capital Trusts (VCTs)

When searching the web for the words Venture Capital, it came back with:

''Capital invested in a project in which there is substantial element of risk, typically new or expanding business''.

The Government introduced Venture Capital Trusts [VCTs] in 1995 to encourage investors to support new and expanding ventures by offering substantial tax benefits.

VCTs shares many similarities with the better known Investment Trusts and are quoted on an exchange; they are approved by HMRC and invest in shares or lend money to small and unquoted companies. Investing in these types of businesses is not without risk and more akin to investors who are comfortable with market fluctuations. You can also gain some diversification when investing in these higher risk investment strategies, as the VCT will hold shares in a range of ventures. VCTs can be sector specific in the same way some investment funds specialise in particular sectors such as wind farms or Biofuels. Investors should note that a change in Government funding for an industry could have a serious impact if a VCT is not well diversified across the industries. The recent change in solar power policies is a prime example.

The underlying investments and nature of VCTs can make them difficult to sell due to illiquidity.

VCTs have tax advantages:

  • Before explaining some of the tax benefits, investors should consider that it would be unwise for the tax tail to wag the risk dog. Tax reliefs alone are not necessarily sufficient to take risks above your normal comfort zone. To additional and higher rate tax payers the tax relief may seem attractive however careful consideration to the nature of the investment should be given before investing.

  • On newly issued VCT shares, investors can claim 30% income tax relief on subscriptions made during the year of issue up to a £200,000 investment. A certificate entitling you to income tax relief should be provided at purchase. VCTs can be held on a Raymond James General Investment Account, however in order to claim tax relief they must be purchased in your name so that the income tax relief certificate is addressed to you. Tax can be reclaimed by your tax specialist. Income tax relief may have to be repaid if the VCT shares are disposed of within 5 years of purchase.

  • Newly issued VCT shares and those bought on the secondary market may benefit from dividend relief on income paid by the fund and also disposal relief on capital gains. It is important to note that if you are entitled to capital gains relief on the VCT that you hold, you may not be able to claim losses against other gains.

  • Dividend and disposal reliefs are limited to the permitted maximum investment which was raised to £200,000 from the 2004-05 tax year.

  • The investment holdings with in the VCT are exempt from Capital Gains Tax on chargeable gains providing greater growth potential.

  • Investors obtain 'front-end' income tax relief by submitting claims to their own HMRC office, either as part of their SA tax return, or separately.


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