Venture Capital Trusts (VCTs) are listed companies that are run by a fund manager and which, in turn, invest mainly in smaller companies that are not quoted on stock exchanges.
When might a Venture Capital Trust be for you?
VCTs are sophisticated, long-term investments only suitable for inclusion in significant portfolios. Conventional wisdom suggests they should account for no more than 10% of an equity portfolio. It is difficult to access the capital invested in the short term, and anyone considering an investment should ensure they are comfortable with this, and all other risks. We assume investors will make their own assessment of their expertise and the suitability of a VCT for their circumstances. Those with any doubts should seek expert advice.
VCTs can be an invaluable financial planning tool, both leading up to and in retirement. After ISA and pension allowances have been used, VCTs could be the next port of call for tax-efficient investing.
Tax-free dividends are the primary source of returns for VCT investors and in the current low interest rate environment dividends continue to look attractive, with yields in the region of 5% on offer. Please remember dividends are variable and not guaranteed, and unlike cash, the value of VCTs will fluctuate and investors could lose money.
What are they?
VCTs were created over 20 years ago. They allow investors to support some of the UK’s smallest businesses by providing the capital they need to grow and develop. To encourage investment in this crucial and higher risk area, the government offers generous tax benefits to investors.
A VCT is a company whose shares trade on the London stock market and, rather like an investment trust, aims to make money by investing in other companies. They invest in smaller, sometimes fledgling, companies, some of which could struggle or fail altogether, meaning losses for investors. The VCT manager may also have trouble selling the underlying investments. Investors should also be aware that VCT shares are illiquid. This means they can be difficult to sell (and buy) on the secondary market.
How VCTs work
Investments in Venture Capital Trusts carry tax relief to encourage you to invest in these smaller, higher risk companies. By pooling your investments with those of other customers, VCTs allow you to spread the risk over a number of small companies.
- You can invest by subscribing to new shares when a trust is launched or by buying shares from other investors when the trust has been established.
- You will get Income Tax relief when you buy newly issued VCTs, currently at the rate of 30% on investments of up to £200,000 per tax year. This relief is provided as a tax credit to set against your total income tax liability and, therefore, cannot exceed your total tax liability for the tax year. You won’t get this tax relief if you buy existing Venture Capital Trust shares.
- You have to hold shares in a VCT for at least five years to keep the income tax relief – if you have to sell them before then, you’ll lose this benefit.
- You won’t pay any Capital Gains Tax on profits from selling your VCT shares, no matter how short a period you have held them provided the company maintains its VCT status.
The value of your investments can go down as well as up and you may get back less than you invested. Small, unlisted companies offer you the chance at making higher returns but they also carry a high risk. Levels and bases of reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.