Venture Capital Trusts - over 20 years in the making
Venture Capital Trusts (VCTs) were introduced as a tax relief in 1995. VCTs invest in small companies and there are various constraints on the type of company into which a VCT can invest. VCTs are quoted on the stock exchange.
Over the years there have been changes to the reliefs available to investors and the rules under which the VCT makes qualifying investments but the fundamental characteristics of the scheme remain.
For the last few years HMRC have collected data from which show the number of investors and the amount of investment claimed under the VCT scheme. The most recent data - for the 2014/15 tax year - reveal that investors have claimed total income tax relief of over £400 million. For all years since 2004/05 the largest group of investors have invested under £10,000 although a quarter of the total amount invested in 2014/15 was from individuals investing between £150,000 and £200,000. The latter figure is the maximum annual investment that can be made with tax relief.
The tax breaks are certainly worth having. Provided that the subscriber for shares in a VCT retains the investment for at least five years and the VCT does not breach the investment conditions of the VCT legislation, an investor obtains reductions in their tax liability of 30% of the amount invested. In addition, dividends received are exempt from tax and any capital gains on the eventual disposal of the shares are also tax free. The latter two tax breaks are also available to those who acquire the shares second-hand, for instance on the stock market.
An increasing number of individuals are attracted to VCT investment due to the reductions to the maximum amount of tax efficient investments in pension funds. Many VCTs aim to pay a dividend equivalent to 5% of the initial investment and so the investments may be regarded as a tax-free source of income in retirement.
The winter and spring months are the prime periods in which VCTs offer new shares to investors. Investors need to recognise the relatively high risk nature of the investments and in particular the increased investment constraints imposed on VCTs by legislation introduced in 2015. Key changes include:
- an introduction of a maximum amount a company can receive from VCTs to £12 million over its lifetime (or £20m for a ‘knowledge intensive’ company)
- a company will normally have to receive its first risk finance investment no later than seven years after its first commercial sale (or ten years for a ‘knowledge intensive’ company)
- prohibition on the use of VCT funds to acquire existing business assets rather than provide funds for expansion of businesses.