VCT Guide

Learn about VCTs with our free guide

Use our free VCT guide to learn about how they work, the risks they attract, and the potential benefits of using them to diversify your portfolio. Once you have used the VCT guide to familiarise yourself with venture capital trusts, you can use our free table to compare VCTs and apply:

 

What are VCTs?

VCTs are quoted limited companies whose purpose is to invest shareholders’ funds in smaller unquoted trading companies (including AIM listed stocks) – with potential for growth and to eventually be floated on the stock market, sold, or refinanced – with a view to making a profit in a tax-efficient way. The companies VCTs invest in have exciting growth prospects but they also have associated higher risks.

 

VCTs are run by investment managers, and raise their funds from private investors. Money raised from individual investors is pooled in order to acquire a portfolio of different investments and to spread the risk. The VCT shares are quoted on the London Stock Exchange.   Managers must invest at least 70% of new proceeds in qualifying holdings within 3 years , that is shares or securities that meet the conditions of the scheme and there are several rules surrounding the companies which VCTs are allowed to invest in, in order to protect its investors. To ensure that the VCTs are only investing in genuinely small enterprises, at the time of the VCT issue, the gross assets of the company must be less than £15million. The company must have no more than 250 full-time employees and certain trades are specifically excluded, such as hotels, nursing homes and banking. The company’s shares should not be listed on a recognised stock exchange.

 

VCTs offer a number of tax benefits, including 30% Income Tax relief on new subscriptions if the shares are held for at least five years.   However, there are also a number of important disadvantages, namely, costs are relatively high, VCT shares are illiquid and almost invariably trade at a wide discount to the underlying Net Asset Value, and investment risks are usually high. In our view, VCTs should only be considered by experienced investors who are in a financial position to take a longer term view and tolerate a higher level of risk.

 

Generalist VCTS

These VCTs typically invest in unquoted companies in the hope of making a profit when the company is sold or floated.

AIM VCTs

AIM VCTs are similar to traditional investment or unit trust/OEIC funds where the manager selects companies in which to buy and sell shares. The main difference however is that the fund manager can only invest in new shares of companies listed in AIM or are about to list.

Limited Life VCTs

These VCTs have a set shelf life and are designed to "wind up" after a set term providing an exit for investors.

Frequently Asked Questions

What are the advantages of investing in VCTs?

• Income Tax relief and Capital Gains Tax relief
• Diversification
• As the value of the investments rise, profits can be paid out as tax-free income

What are the disadvantages/risks of VCTs?

• Young companies with a venture capital backed nature carry an above-average level of risk, but the rules in place and the diversification aspect help and to balance that risk
• If you need to get your money out then you can, but you would have to repay the tax rebate in the first five years and this would come with the significant possibility that you would lose some of your capital.
• For investors in VCTs which only raise a small amount of money, there are potential disadvantages such as higher charges and a lower level of diversification.
• If a VCT does not raise sufficient funds to reach critical mass, then it may reduce diversification and thus increase risk
• Because VCTS invest gradually over three years, then, depending on market timing, a large portion of your investment could be held in cash before it is invested, but this also helps to balance the risk to your investment 
• VCTs invest approximately 70% of their capital in unquoted companies, which carry a higher degree of risk than quoted companies. Consequently, these companies may not perform as expected and in some circumstances may fail completely. To diversify and spread the risk, VCTs invest the remainder of their capital in other assets, ranging from low risk fixed interest investments to higher risk assets such as unit trusts or hedge funds.
• VCT shares can have a limited secondary market, and it is likely that the market value of the shares will not fully reflect their underlying net asset value.  

What type of investor is a VCT suitable for?

VCT’s are not suitable for all investors. They might be right for your investment portfolio if you:

• Are looking to reduce you income tax liability
• Seek a long-term investment opportunity
• Are in a position to take on a higher risk for potentially higher gains
• Want a highly tax-efficient alternative to other funds that invest in UK smaller companies
• Are seeking to potentially reduce the overall risk to your investment portfolio with a fund that typically follows a different cycle to stock markets
• Require an additional source of retirement income (you are not locked in as you are with a pension.)
• Are looking for an alternative tax-efficient investment to an ISA

If you are in any doubt about the suitability of an investment in a VCT you should seek independent financial advice.

What is the annual limit for VCT subscription?

You can invest between £3,000 (depending on the provider) and £200,000 in a VCT in any single tax year. This applies to the total subscription, and therefore includes shares bought on the stock market, and reinvested dividends.

Investors who have a large income might be tempted by the tax benefits of VCTs to invest the maximum subscription (£200,000). However, it is thought that the maximum proportion of an investment portfolio that should be dedicated to UK smaller companies is 25%, and that VCTs should be used to make up some of that exposure. Therefore, the amount you invest should be based upon your own financial circumstances and appetite for risk. 

How do I obtain tax relief from a VCT?

Income tax relief can be obtained in one of two ways. Each VCT will issue a certificate to subscribers, usually within a few weeks of the share allotment. This can either be used to claim the relief in conjunction with a Self Assessment form at the end of the tax year, or, you can write to your HMRC Office and ask to change your tax code so that you receive the tax relief on a monthly basis with your pay cheque.

The 30% Income Tax relief is available regardless of whether you are a lower, basic, or higher rate tax payer, providing you are a UK resident aged 18 or over. However it can only be used to reduce your income tax to zero in a particular tax year.

Why do some VCT issues close before the stated date and some afterwards?

Each VCT share issue is of a limited size, with very limited flexibility. The closing dates are therefore just a guide, because if the offer gets fully subscribed before this date then it will close.

However, if it is not fully subscribed by the closing date, then it will often be extended. Be aware that popular issues can close much earlier than the closing date, so track the level of funding it has obtained. It is worth remembering that the second half of shares are usually taken up faster than the first.

Do VCTs offer any Inheritance Tax relief?

No. VCTs are fully listed shares and are therefore treated in the same way as other equities, and are liable for Inheritance Tax.

Can VCT dividends be reinvested?

Yes, dividends from some VCTs can be reinvested, but not all of them. It depends on whether the VCT offers this facility or not - this information will usually be provided in the VCT product information.

Can I sell my VCT shares after the five year qualifying period?

You can sell your shares at any time, but in order to retain the initial 30% Income Tax relief, you must hold them for at least five years, otherwise you will have to repay the upfront Income Tax relief you received.

VCTs invest funds gradually over the first three years, so until this point is reached then a large portion of your investment could be held in cash and will not have had time to grow.

How can I sell VCT shares?

Although VCT shares are fully listed on the London Stock Exchange they are relatively illiquid. If you choose to sell your shares in the secondary market then it may be that you would have to do so at a significant discount to the net asset value.  If you do want to sell, most VCTs offer 'share buyback schemes', so you could contact the fund management company and see what they are able to offer. VCTs with a planned exit strategy generally do not suffer from discounts to Net Asset Value as they are designed to exit at full value over a set time scale.

What happens to my VCT if I die?

Upon death, the whole value of a VCT can pass to a spouse, along with the rest of your estate, and is liable for inheritance tax. However, even if you die before the five year minimum period for Income Tax relief is reached, your estate will not have to repay this money.

Tax advantages of VCTs

Under current legislation, the Government offers 30% Income Tax relief on VCTs, limited to total VCT investments of £200,000 per person per tax year. For example, if you invested £10,000, you would receive £3,000 back in Income Tax relief – either as a lump sum rebate or through your salary in the form of a tax code amendment.

It is in the Government's interests to support UK smaller businesses which could become the big businesses of the future, and offers tax incentives to encourage investment in them.   Initial Income Tax relief is limited to the amount which reduces the investor's income tax to nil – so if you have only paid £5,000 in Income Tax, you would only be eligible for a £5,000 rebate – and is only available for VCT shares in the year of subscription. If the investment is not held for five years, or the VCT does not invest at least 70% of the funds raised in qualifying investments within three years, the investor's initial tax relief will be withdrawn and you will have to repay it. Dividends paid by VCTs are not liable to any tax.  

To be eligible for Income Tax relief, you must buy shares in a VCT upon its launch or in a top up offer.   When you eventually sell your VCT, any gain you make will be exempt from Capital Gains Tax. You will be eligible for Capital Gains Tax relief even if you buy into a VCT once it is quoted on the stock market.   Most VCTs will have a provisional tax clearance, because they have three years to meet the qualifying provisions, for example, investing a minimum of 70% in qualifying securities. While no VCT has yet failed to meet the requirements during that time, the Inland Revenue grants provisional relief subject to the conditions actually being met.   Levels and bases of, and relief from taxation are subject to change.