Are you curious about the potential uses of venture capital trusts? Here you’ll find all the information you need to better understand what they are and how they function.
Read on to learn more about these investment companies, what they do, and how they might be of benefit to you and your business.
What is a Venture Capital Trust?
What defines a Venture Capital Trust, also known as a VCT, is that it’s a company sharing trades on the London stock market. It doesn’t sell its own products or services; instead, it makes money through investments. Usually, these investments are in small companies, which hugely benefit from a cash injection when starting or growing their business.
Of course, investing in new projects is a risky business. However, there are incentives available, such as tax savings, and these make the prospect of risky investments much more appealing. The government has introduced these incentives to stimulate the economy by encouraging investment into small, up-and-coming businesses.
There are two different kinds of VCTs: Generalist and AIM. The difference between the two is that AIM venture capital trusts invest in companies that are listed on AIM, which is a stock market for smaller-growth companies. In contrast, generalist VCTs usually invest in unquoted companies that are valued periodically.
When might a Venture Capital Trust be for you?
Investment in a VCT, and its associated tax breaks, could bring huge benefits to a diverse range of investors. Here are just some groups that might consider using one to invest in small businesses.
Business owners – Investment in a VCT allows you to offset tax bills which can increase your earnings, especially if you pay yourself through dividends and are taxed highly as a result.
Landlords – A VCT investment will enable you to reduce the tax you pay on your properties; this is especially useful now that you only receive a basic rate tax credit.
People planning for retirement – A VCT is an alternative option when you’re reaching the limit of what you’re able to pay into your pension without incurring a penalty.
How Does A VCT Work?
Venture Capital Trust investments bring benefits like tax relief, implemented by the government to encourage investment in small companies that would otherwise be considered high risk.
The risk is decreased when you use a VCT because your investments are combined with other customers and distributed across a number of companies: that means if one company fails, you’re not necessarily going to incur an overall loss.
To invest, you subscribe to new shares when a trust is launched. You also have the option of buying shares from investors in a previously established trust, but you enjoy income tax relief when you buy newly issued VCTs.
The current rate of relief is 30% on investments up to 200,000 GBP per tax year. To keep the relief, you must hold these shares for at least five years. You can sell your shares at any time without paying Capital Gains Tax on any growth in value they have accumulated under your possession.
Not every investment is permissible under this scheme: Venture Capital Trusts have to abide by strict regulation to qualify for investor tax relief.
Risk Return
Although you’ll enjoy tax relief either way, there’s no guarantee that your investment will increase in value. These are high-risk investments, after all.
Access to finances
You can sell your shares at any moment without paying tax on any value-increase; however, you’ll only enjoy tax relief if you keep them for 5 years.
Charges
Charges for VCTs can be high, and you may be subject to performance fees – depending on how your investment performs.
Security
In the event that a fund manager goes bankrupt, you’re entitled to claim compensation of up to 50,000 GBP. To make a complaint, contact the Financial Conduct Authority.
How To Buy A VCT
To buy VCT shares, you have two options. You can either buy shares from another investor or apply for shares when a new VCT is up for investment.
If your motivation is tax relief, you should do the latter. First, you’ll have to read through a prospectus. Then, you’ll complete an application form and send the money either by cheque or online payment.
Possible Taxes On Venture Capital Trusts
Money from investments in VCTs is not subject to income tax as long as the investment does not exceed 200,000 GBP per year. You also won’t have to pay Capital Gains Tax on growth when your investments perform well.
However, if your investments end up making a loss, this can’t be used to reduce your overall Capital Gains Tax bill.
