Looking for a venture capital trust can be a minefield and a decision to not take lightly, speaking to a financial adviser is a good start.
What is a venture capital trust (VCT?)
A venture capital trust raises money from wealthy or experienced investors and uses it to invest in innovative companies. When you invest in a Venture Capital Trust, you become a shareholder of the trust itself, rather than the individual companies that the trust invests in.
The government offers generous tax benefits for people wishing to invest in a Venture Capital Trust, which reflects the high-risk nature of the companies being invested in.
What type of companies do VCTs invest in?
VCTs invest in companies that need money in order to develop. This tends to be small or relatively new businesses that are either unquoted or listed on the Alternative Index Market (AIM).
What tax relief is available when investing in a VCT?
VCTs offer tax benefits to encourage people to invest such as:
No income tax is payable on dividends paid from VCT shares.
No capital gains tax is due when you sell your VCT shares.
You can claim up to 30% income tax credit on investments up to £200,000 each tax year. However, you need to have paid at least the amount of tax that you are applying to claim back, and you must hold the shares for a period of at least five years. Tax relief is claimed via tax return.
What types of VCT are available?
There are three main types of VCTs, each with a differing investment focus. The types of VCT available are:
AIM VCTs: invest in shares issued by AIM companies. They are not always small or start up companies, although they can be.
Generalist VCTs: this type of VCT tends to invest in unquoted companies, although some larger ones will also hold AIM listed companies. Some generalist VCTs will invest in mature companies whereas others will invest in younger companies that may not be profitable yet, although they will have very strong potential.
Specialist VCTs: this type of VCT tends to focus on one sector rather than diversifying across different sectors. It is for this reason that specialist VCTs can be riskier than AIM or generalist VCTs.
How much can I invest in a VCT?
The maximum amount you can invest in a VCT and claim tax relief for is £200,000 per tax year. Many VCTs will also have a minimum investment amount which is typically around £5,000.
How do I invest in a VCT?
You can invest in a VCT via a specialist broker. Some VCTs can be invested in at any time and others will close once they have reached their target investment amount.
How do I sell a VCT?
VCTs are less liquid that other investments such as unit trusts. Many VCT managers do offer to buy back shares periodically, but this is typically at a preferential rate. They can be sold on the stock market, but again, this is typically at a price much lower than the value of the underlying assets.
It is also important to remember that you must hold VCT shares for a minimum of five years, otherwise you will have to pay the 30% income tax relief back.
What returns to VCTs offer?
One of the main attractions of investing in VCTs is that the successful ones offer regular, tax-free dividends.
Should I consider investing in a VCT?
VCTs aren’t for everyone and are generally aimed at experienced or wealthy investors. A VCT may be a good option for:
People with a large income tax liability due to the attractive income tax reliefs available to those investing is SEIS investments.
People who would like to potentially receive a tax-free income via dividends.
Things to consider before investing in a Venture Capital Trust scheme
VCTs are generally considered high risk and are aimed at wealthy or experienced investors. If, however, you would like to find out more about VCTs or feel that might be a good option for you, Woodward Financials were awarded best wealth management firm in 2021 and again in 2022 and have a team of advisers ready to help.