Fundraising levels sixth highest since launch
Figures published by the Association of Investment Companies (AIC) show that £330 million (value of new shares issued), was raised by the Venture Capital Trust (VCT) sector during the 2011/2012 tax year compared to £365 million in the 2010/11 tax year and the sixth highest amount since VCTs were first launched in 1995.
A range of small higher-risk trading companies
VCTs are designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, although they can be AIM (Alternative Investment Market) listed. So, if you invest in a VCT, you spread the investment risk over a number of companies. There is a risk that these companies may not perform as hoped and in some circumstances they may fail completely. Recent Budget changes have reduced the maximum size of company that VCTs can invest in, meaning that VCT shares issued now may carry a higher risk than those issued in the past.
Meeting certain conditions
VCTs must be approved by HM Revenue & Customs (HMRC), and to gain approval they, must meet and continue to meet certain conditions. This approval enables investors to qualify for certain tax reliefs, but does not guarantee the safety or success of any investments you make in a VCT. If you invest in them you may be entitled to various Income Tax and capital gains tax reliefs, and VCTs are exempt from corporation tax on any gains arising on the disposal of their investments.
Ian Sayers, Director General, Association of Investment Companies said:
“This is the third year in a row that the VCT sector has surpassed the £300 million mark, and the sixth highest amount raised since VCTs were first formed in 1995, reflecting strong demand from investors.
“Capital raised by the VCT sector is filling an important funding gap for UK smaller companies, and supporting UK enterprise.”
‘Qualifying’ after three years
VCTs must meet certain conditions to be approved by HMRC including that at least 70 per cent (by value) of the total assets must be ‘qualifying’ after three years. If a VCT ceases to have approval as a VCT all tax advantages will be lost.
For the current tax year 2012/13 Income Tax relief at 30 per cent is available on investment in VCTs of up to £200,000 to be set against any Income Tax liability that is due, whether at the lower, basic or higher rate, but relief will be limited to the amount that reduces the investor’s Income Tax liability to nil, and the tax credit on dividends received cannot be reclaimed.
New ordinary shares
To qualify for Income Tax relief, the shares must be new ordinary shares and must meet certain other conditions to be eligible. You can get this relief for the tax year in which these eligible shares were issued to you, subject to certain conditions including that you hold them for at least five years.
Dividends from ordinary shares in VCTs are exempt from Income Tax for both newly issued and second-hand shares (provided the total of both added together is less than the annual investment allowance in the tax year purchased).
Disposals of ordinary shares in VCTs (both newly issued and second-hand) are exempt from CGT (Capital Gains Tax) on gains.
VCTs are higher risk investments and are generally considered to be long-term investments. They are complex products and are not suitable for all investors. If you have any doubts as to the suitability of a particular VCT, or VCTs in general, or you require advice of any kind, you should seek professional advice. Do not invest in a VCT unless you have carefully thought about whether you can afford it and whether it is right for you.
