Venture Capital Trusts explained
Venture Capital Trusts (VCT's), were introduced to encourage investments in smaller companies. A VCT is a quoted investment vehicle, with an investment fund manager and a diversified spread of investments. The companies in which a VCT invests must be unquoted for VCT purposes. This means that none of its shares, stocks, debentures or other securities can be listed on a recognised stock exchange. Companies whose shares are listed on the Alternative Investment Market (AIM) of the London Stock Exchange or on OFEX are unquoted companies. VCTs invest in small companies that have assets of no more than £7m with the aim of growing the companies and selling them or launching them on the stock market. Because the firms are small, there is a high level of risk compared to investing in a larger, established business, although no VCT has gone bust since they were launched. There are also concerns about the liquidity of the market, with some investors unable to sell their investment. Investors only receive tax relief on new issues in VCTs, not through second-hand VCT shares.
VCT Income tax reliefs
- Tax free dividends, which include both income derived from the underlying investments, and from capital gains realised inside the VCT portfolio.
- Income tax relief' at the rate of 30% of the amount subscribed for shares issued in the tax year 2006/07 and onwards. This applies to a maximum investment amount of £200,000, provided the shares are held for at least five years. This rebate is only available when you invest in a new issue of shares in a VCT or a top-up.
VCT Capital gains tax reliefs
- Exemption from tax on any capital gains made on the VCT investment itself. When you eventually dispose of a VCT any gain will be completely exempt from Capital Gains Tax.
Ethical Venture Capital Trusts
VCTs differ from most collective investments in that the manager can have an involvement in the running of the company, essentially an engagement mandate, working closely with the firm's management. It is possible for ethical investors to subscribe to venture capital trusts investing in renewable energy, such as wind farms.
RISK WARNINGS :
VCT's are higher risk investments, and suitable for clients with significant assets who can afford to lose money. You could get back less than you originally invested. The legislation surrounding VCT's, and hence their taxation treatment may change in the future.
VCTs are inherently illiquid and therefore might not be easily sold when you wish to make a disposal.