Venture capital trusts - by independent financial adviser John Bramwell

Venture Capital Trusts

What are Venture Capital Trusts (VCTs)?

VCTs are collective funds that operate in a similar manner to Investment Trusts, apart from having to comply with specific rules for the companies they can invest in.

VCTs were first introduced in 1995 to encourage investment in small UK companies, particularly start-ups and early stage firms. The incentives for investment in such high risk companies are major tax benefits. An individual can invest up to £200,000 in VCTs per tax year.

What sorts of VCT are there?

There are several types of VCT, including:

Generalist - invest in a variety of small private businesses in different market sectors. This type carries a high risk as there is likely to be a lot of losers amongst the investments, but this could be offset by a few very big winners.

Specialist - the same as generalist VCTs except that they invest in a selection of businesses in a narrow market sector, eg. health care.

AIM - invest only in new subscriptions for businesses listed on the AIM (Alternative Investment Market). They tend to be less risky than the generalist and specialist VCTs which invest in unquoted businesses.

Income - invest in shares and loan stocks. They pay relatively high dividends and are less risky than the other types of VCT.

What are the tax benefits of VCTs?

The tax benefits vary according to whether you invest in a new VCT share subscription or in existing VCT shares.

For new subscriptions the benefits include:

30% income tax rebate on the cost of the investment for two years, on condition that the shares are held for at least three years and that the investor has paid this amount of tax.
No liability to higher rate tax on dividends.
No capital gains tax on disposal.

For share purchases the benefits include:

No liability to higher rate tax on dividends.
No capital gains tax on disposal