A Venture Capital Trust (VCT) is a company whose shares trade on the London stock market. A VCT aims to make money by investing in other companies. These are typically very small companies that are looking for further investment to help develop their business. The VCT often invests at an early stage in a company’s development, so it is a higher risk investment. This means that the VCTs are aimed at wealthier investors who can afford to take a long-term view and accept falls in the value of their investment.
VCTs also offer some attractive tax benefits. If you are a tax payer, you will receive a tax rebate of up to 30 per cent when investing in a VCT. The initial investment, up to a maximum of £200,000 per person per annum, attracts 30 per cent provided it is held for at least five years.
You need to be aware that this is a tax rebate and restricted to the amount of income tax you pay; tax deducted at source on dividends is not eligible. This rebate is only available when you invest in a new issue of shares in a VCT or a top-up, but it’s worth noting that if you buy VCTs on the secondary market in the same tax year these count towards the £200,000 allowance, despite the fact you don’t receive the income tax incentive.
Capital gains and dividends are also tax-free when you eventually dispose of a VCT, although there is no relief for capital losses. By buying shares in an existing VCT quoted on the stock market you become eligible for a capital gains tax exemption and benefit from tax-free dividends as they are paid. However, to obtain the 30 per cent tax relief against income tax you must buy shares in a VCT via a new subscription.
VCTs invest in unquoted business, so they are high risk and they can be illiquid, and management costs can also be high.