Venture Capital Trusts – Which Investors Are They Suitable For And What Tax Relief Do They Offer?
The UK government offers investors in Venture Capital Trusts (VCTs) generous tax breaks in the form of income tax relief, loss relief and Capital Gains (CGT) and Inheritance Tax (IHT) exemptions. But what exactly are VCTs, why are they supported and incentivised by the UK government and what kind of investors, or what role in a broader investment portfolio, is the investment vehicle suited to?
Venture Capital Trusts Explained – What Exactly Are VCTs?
Venture Capital Trusts (VCTs) are a kind of closed-ended fund with a fixed pool of capital that invest in promising UK-based growth companies of the kind often referred to as start-ups. Because the British government is keen to incentivise private capital being invested in young companies with potential, because a thriving start-up and SME economy is a major boost to the whole UK economy, it offers investors in these companies some attractive tax reliefs and exemptions.
Venture Capital Trusts invest in smaller, usually relatively young private companies that qualify for either the Enterprise Investment Scheme or are listed on the London Stock Exchange’s AIM exchange, which is a sub-market for smaller, growing companies.
Because VCTs invest in smaller companies which are either still privately owned or AIM-listed (the sub-market generally has lower liquidity levels than the main LSE), they are considered higher risk investments. That’s partly why VCT investments are supported by attractive tax reliefs and exemptions. It’s also why they are not suited to standard private investors and are a fit for higher net worth and sophisticated investors who are considered qualified to make an informed decision on the level of risk they are taking on.
However, one advantage of VCTs over investments in individual EIS companies or AIM-listed companies is that they are actively managed and spread capital across equity stakes in a number of companies. That means an experienced professional is assessing the companies VCTs invest in and the risk is spread across a number, with the expectation not all will realise their potential and grow in value.
To sum up, the key qualities of Venture Capital Trusts are:
What Kind Of Companies Do VCTs Invest In?
As a result of the attractive tax regime Venture Capital Trusts offer investors, these closed-ended funds can only invest in specific kinds of companies. They should either by private companies that qualify for the Enterprise Investment Scheme or AIM-listed shares. Key qualities the kind of companies VCTs invest in are:
Different Kinds Of Venture Capital Trust
Different VCTs have different investment strategies. They might invest in only private companies, only AIM companies or a combination of both. Some VCTs also focus on a particular sector such as technology or health.
Tax Benefits For VCT Investors
Investing in a VCT comes with some significant tax advantages designed to compensate for the fact that investing in the private or less liquid AIM shares of smaller companies is higher risk than mainstream retail investments.
VCT tax reliefs include:
These tax benefits apply to amounts of up to £200,000 invested in VCTs in any given year. VCT shares must also be held for at least 5 years to take advantage of tax relief. If sold before that point, any tax relief already taken advantage of will be repayable. Income tax relief can only be set off against a tax bill, so investors must pay enough income tax to be offset to take full advantage.