Venture Capital Trusts
Venture Capital Trusts (VCTs) invest in smaller companies that are in their early stages of development and looking for inward investment to grow quickly into much larger companies.
Its the type of investment that stimulates a healthy flow of successful new companies into the UK economy, so the government ensures that VCT shareholders get generous Income- and Capital Gains Tax relief.
This tax relief helps to make the companies within VCTs accessible and more of an attractive investment proposition for you than they would be left as just a single long-term investment in a high risk company.
VCTs must adhere to strict rules to qualify for this tax relief. Maximum limits for companies within VCTs are £15m turnover and 250 staff, very much within the bracket of SME. For example, a solar farm construction company that starts out small-scale and needs working capital to expand its number and scale of sites quickly, before government subsidies are removed.
For this reason these unmatured companies are generally considered to be higher risk, but, by pooling your investments and choosing a trust manager with a track record of selecting companies that are good investments, a VCT allows you to spread your risk across several such companies which could help reduce risk overall.
It's also expected that you will be invested in a VCT for the longer term, after which you might, for example, remove large dividends when the company reaches maturity and decides that it's ready for Initial Public Offering (IPO).
How do I buy shares in a VCT?
The companies that VCTs invest in are usually privately owned and initially too small to be listed on stock exchanges, but that is exactly where you go to invest in them through a VCT. You can buy new shares on the London Stock Exchange when a trust is launched, or buy shares from another investor after launch.
Things to consider when buying VCT shares
There are both up- and potential downsides to a VCT, so you should think about whether it is the right option for you and your finances:
- You will get Income Tax relief when you buy newly-issued VCTs, currently at a rate of 30% on investments of up to £200,000 per tax year. It's provided as a tax credit to set against your total Income Tax liability. If you sell your shares after holding them for less than five years, HMRC will reclaim this benefit.
- You won't have to pay any Capital Gains Tax when you sell your VCT shares, however long you hold them for
- Smaller, unlisted companies tend to be viewed as higher risk, so you should be comfortable with that if you want to invest in a VCT
- Although in theory you can sell your shares at any time, in practice you will probably lock your money away for at least five years, in order to keep your income tax relief.
- Generally, investing in VCTs should be considered a medium to long-term strategy of at least 5-10 years
- When you do sell your shares, it can sometimes be more difficult to find a buyer than for other types of shares
- Charges for VCTs can be higher than other types of investment trust, and you may also be charged performance fees, depending on how well the trust performs
Remember that investment decisions are complicated, and there is always a risk that you could lose some or all of what you put in. If you are in doubt, speak to a financial adviser, who can help you build an investment strategy to suit your goals and attitude to risk.
Last updated: 21 May 2015