Venture Capital Trusts

The Venture Capital Trusts (VCT) scheme has been designed to encourage individuals to invest in small, high risk trading companies.

A Venture Capital Trust is a company, broadly similar to an investment trust, which has been approved by HMRC and which subscribes for shares in, or lends money to, small unquoted companies.

In general, the Venture Capital Trusts scheme is less well known than the Enterprise Investment Scheme (EIS) which offers similar tax breaks for investors. Both of these schemes are designed to encourage private individuals to invest in smaller usually high-risk companies.

However, the two schemes differ in that an EIS investment is made straight to the company and a Venture Capital Trust investment is like investing in an investment trust with a high-risk profile.

The Venture capital trust scheme offers investor’s Income Tax relief of 30% on new subscriptions for ordinary shares in VCTs. The maximum amount qualifying for relief is £200,000 in each tax year. Dividends received from VCTs are exempt from Income Tax, provided the shares acquired (by subscription or purchase) are within the annual limit of £200,000 and held for 5 years.

Shares in VCTs acquired within the annual limit are also exempt from CGT on disposal at any time, but losses on disposal are not allowable as capital losses.

The VCT itself also benefits from certain tax reliefs.

The VCT is exempt from Corporation Tax on chargeable gains (and losses for chargeable gains purposes are not allowable losses). There are limits on the total amount of finance that investments a VCT may receive or benefit from. This is limited to £5m in any 12-month period and £12m (or £20m for knowledge-intensive companies) in its lifetime.

In addition, the first VCT investments must be made no later than 7 years after its first commercial sale. There are also rules on the VCT’s gross assets, independence and qualifying trade.

The VCT rules are approved under the European Union (EU) State Aid rules. That means the use of the scheme is permitted by the EU to help drive economic growth in the UK. As the UK prepares for Brexit it remains to be seen if any changes will be made to the scheme. If you would like to discuss further the use of VCTs as an investment opportunity please get in touch.