Introducing Venture Capital Trust
If you have a small company or a start-up and are looking for investment to further develop your business, it can be difficult to know how to approach a VCT to receive funding. Not to worry, our expert advisors are here to help you every step of the way.
What is a Venture Capital Trust?
A Venture Capital Trust or a VCT is a publicly listed, closed-end fund in the United Kingdom that allows individuals to get access to venture capital investments via the capital markets. They encourage small businesses to grow and provide potentially high returns through high-growth private companies with multiple tax advantages included.
The VCT was released by the government in 1995 and in the two decades that they have been released VCTs have helped create jobs and boost the economy of the United Kingdom.
Alongside that, VCTs offer several tax reliefs. VCT offers up to 30% upfront income tax relief, tax-free dividends, and an exemption from capital gains tax on the shares. These tax incentives are there to help compensate investors for the risk they are taking with their money.
Investments in the Generalist VCT are made through a combination of loan notes or preference shares alongside equity in the business and investments.
VCT investment can be done for a variety of reasons, the first being that it offers growth potential. Smaller companies have a higher chance of making drastic profit increases as they have a higher growth potential than comparatively larger companies. By offering investors access to a very diverse portfolio of small companies, the VCT investment can offer an attractive way to gain market exposure to high-growth, high-return investment opportunities.
When investing in VCTs you are entitled to claim a number of tax incentives on investments up to £200,000 pounds per year. These include income tax relief, tax-free capital gains, and tax-free dividends. You can claim up to 30% upfront income tax relief on the amount invested if you keep your VCT for at least five years. If you decide to sell the VCT shares and make a profit, these proceeds will not be liable for the capital gains tax. Lastly, if the VCT pays dividends and there is no tax to pay, you do not have to declare them on your tax return.
Examples of VCT
There are four types of VCTs: Generalist VCTs, Specialist VCTs, AIM VCTs, and Limited life VCTs.
Generalist VCTs cast a wide net to find investment opportunities in companies at various stages of development. Around ¾ of all VCTs belong to this category and this is the most popular type. Investments in generalist VCTs are usually made through a combination of loan notes or preference shares alongside equity in the business. These loan notes and preference shares give the VCTs a large potential income source.
AIM VCTs invest in companies that are or are about to be in the London stock exchange market. Their management has a background in fund management rather than private equity investments. The investments in AIM VCTs are normally made through ordinary shares and these VCTs can be more volatile given that the shares can fluctuate in value.
Specialist VCTs are VCTs that find companies to invest in within one specific sector and have more focused investment objectives. Some examples of the sectors for specialist VCT investments are energy, infrastructure, and bio- technology. These VCTs involve higher investment risks but offer higher returns if the investments do well.
Limited life VCT
Limited life VCTs are low-risk investments that aim to invest capital and then wind up within five to seven years. This VCT will sell its assets and distribute the proceeds to its shareholders.
Common VCT Questions
How do you buy VCT shares?
There are two ways to invest in a VCT; by applying for shares when a VCT is open for investment, or directly through an online broker or financial advisor. You can also buy second-hand shares previously owned by shareholders on the open market through a stockbroker. Whichever route you wish to choose, you should first speak to a financial advisor.
How do you sell VCT shares?
As the market for second-hand shares is very limited, selling VCTs at a fair price is difficult. In most cases, the board of directors for most VCTs offer to buy back VCT shares from existing shareholders. You can choose to sell your shares at any point, however selling them before the five-year mark will require you to repay any upfront income tax relief that has been claimed.
What happens to VCT shares if you die?
Upon the incident of your death, your investment will form part of your estate and will be passed on to your beneficiaries, who can choose to keep it or sell it. Your estate will not be required to pay any upfront income tax relief before the five-year mark.
For more guidance on investing in Venture Capital Trust, get in contact with our team today. We’ll provide you the expert advice you need to make low-risk investment choices that will pay dividends in the long-term.