Launched in 1995, shortly after the introduction of the Enterprise Investment Scheme (EIS), Venture Capital Trusts allow individuals to invest in a range of small unquoted companies and spread their risk. Income tax and capital gains tax (CGT) reliefs are available to investors in VCTs.
The popularity of such schemes has closely followed the health of the general economy, as well as the Government’s changes to company qualification rules and generosity of tax reliefs available to investors.
How VCTs work
- VCTs themselves are quoted companies, run by fund managers. They pool investors funds to acquire a range of unquoted companies (which are often listed on the AIM or PLUS markets), thus spreading the risk.
- VCTs are limited to which companies they can invest in. Companies must be unquoted, carry out a qualifying ‘trade’ and have a gross asset value of £15m or less before investment (this was set at £7m prior to April 2012).
- Fund managers must invest 70% of their assets in qualifying companies within 3 years of the VCT launch.
- When fully invested, VCTs will typically invest in 25-35 companies.
- Qualifying companies must employ no more than 250 employees, and cannot raise more than £2m via VC schemes in the 12 months leading up to the date of VCT investment.
- Due to rule changes over recent years, older VCTs have more choice in the flexibility of their investments.
Types of VCT
There are four main types of VCT:
- AIM VCTs – which specialise in investing in AIM listed companies
- Specialist VCTs – as the name suggests, they specialise in an individual industry or interest sector.
- Generalist VCTs – invest in a wide range of companies, across sectors.
- Limited Life VCTs – which aim to wind up after a specific time period.
Tax reliefs available to investors
- Income tax relief is available to investors. In 2004, Gordon Brown raised the level of income tax relief from 20% to 40%, although this was subsequently reduced to 30% on a maximum investment of £200,000 in each tax year (assuming the investment is held for 5 years).
- Disposal of VCT investments are also free from Capital Gains Tax.
- Dividends are free from income tax.
Further Information on VCTs
For more information, you can read HMRC’s Overview of the VCT scheme (VCTs).
The British Venture Capital Association (BVCA) can also help.
You should always seem professional advice before relying on information contained within this article, as the VCT rules are complex.