Introduced as a tax relief in 1995, Venture Capital Trusts (VCTs) invest in small companies. The rules and reliefs may have been tweaked, but 22 years on they are fundamentally the same. We look at the benefits of VCTs.
The specifics of VCTs, such as the reliefs available and rules for qualifying investments, have changed over the years but fundamentally the scheme remains the same.
£400 million tax reliefs for investors
HMRC has collected data over the last few years to show how many investors have used the scheme and the amount of investment claimed. The most recent data for the 2014/15 tax year reveals that investors claimed income tax relief of over £400 million. Each year since 2004/05, the largest group of investors invested under £10,000. Individuals investing between £150,000 and £200,000 made up a quarter of the total amount invested in 2014/15. The maximum investment that can be made each year with tax relief is £200,000.
The tax breaks available to Venture Capital Trusts are not to be sniffed at. An investor can reduce their tax liability by 30% of the amount invested provided that:
- the subscriber for shares in a VCT keeps hold of the investment for at least five years, and
- the VCT complies with the investment conditions of the VCT legislation
Any dividends the investor receives are also exempt from tax and capital gains on the eventual disposal of the shares are also tax free. Investors who acquire the shares second-hand, for instance on the stock market, can also benefit from these two tax breaks.
Using Venture Capital Trusts for tax-free retirement income
Increasingly, investors are turning to Venture Capital Trusts due to reductions in the amount that can be invested tax-efficiently in pension funds. A number of VCTs aim to pay a dividend equivalent to 5% of the initial investment. As such, the investments could be considered as a tax-free source of retirement income. VCTs are more likely to offer new shares to investors during the winter and spring months.
These investments are by nature relatively high risk and new legislation in 2015 imposes greater investment constraints on VCTs.
Key changes include:
- a maximum of £12 million a company can receive from VCTs over its lifetime (£20m for a ‘knowledge intensive’ company)
- a company must normally receive its first risk finance investment no later than seven years after its first commercial sale (ten years for a ‘knowledge intensive’ company)
- using VCT funds to acquire existing business assets (rather than funding the expansion of businesses) is prohibited.