Venture Capital Trust

Venture Capital Trust

A venture capital trust or VCT is a tax-efficient UK closed-end collective investment scheme. It is designed to provide private equity capital for small expanding companies and capital gains for investors.

It is similar to an EIS however VCT’s are operated by a fund manager who will select circa 20 companies to invest in on behalf of investors.

To encourage investors, the government offers 30% income tax relief on the value of the investment, however the investment. However the investment needs to be held for a minimum of 5 years for the relief to remain qualifying.

Aside from the upfront tax-relief, the other key advantage of a VCT is that any dividends paid are tax-free to the investor. This can create a useful additional tax free income while also allowing the investor to claim tax relief at the time the investment was made.

Example:
Investment
£20,000
Tax relief
£6,000
Net Investment
£14,000
Total risk capital
£14,000

As well as tax-free dividends there is no capital gains tax to pay on any investment growth the VCT makes.

Unlike SEIS and EIS’s there is no loss relief available if the fund fails and there is no way to defer or relieve capital gains tax in the same investment,

Typically speaking most VCT’s aim to create an income return of 5% and above each year, which due to the tax-free classification is the equivalent to a 7% real return to a high rate taxpayer.

These types of investment should be approached with a long term view due to the five-year relevant period.

It is important to note that a VCT does not qualify for Business Property Relief (BPR) and therefore will form part of the investor’s estate upon death.

Net Investment Risk

  • Introduced in 1995 by HMRC
  • 30% income tax relief
  • Tax-free investment growth
  • Tax-free dividend income

“Over £1.5 Billion a year is invested in tax efficient investments”

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