Venture Capital Trusts (VCTs) are investment companies that are listed on the London Stock Exchange and are set up to invest in small UK businesses that meet certain criteria. To encourage support for these businesses, the Government offers generous tax benefits for VCT investing which also recognises the higher-risk nature of the companies they invest in.
VCTs invest in small or early-phase businesses that are either unquoted or listed on AIM (the London Stock Exchange’s market for growth companies). These businesses need investment in order to develop.
VCTs are particularly popular among higher rate taxpayers as they offer a number of tax benefits: 30% income tax credit on investments up to £200,000 each year; no income tax payable on dividends from VCT shares; and you won’t be liable to Capital Gains Tax when you sell your VCT shares.
There are a number of different types of VCT to consider. Most Venture Capital Trusts are Generalist VCTs. These typically invest in unquoted companies across a range of sectors, although some larger VCTs will also hold AIM-listed shares. Generalist VCTs use a range of different approaches. Some focus on young companies that aren’t yet profitable but have strong potential. Others look at more mature businesses and some take an asset-backed approach similar to Limited Life VCTs.
Limited Life or Planned Exit VCTs are at the more conservative end of the spectrum. They aim to reduce some of the uncertainty over how investors will eventually crystallise their investment by launching with the goal of winding up shortly after the end of the five-year holding period required for investors to keep the 30% Income Tax relief.
AIM VCTs focus on companies that are listed on AIM. Unlike Generalist VCTs, investments are normally made through ordinary shares rather than loan notes or preference shares, and it is rare for the VCT to seek board representation.
Whilst the potential returns and tax benefits can be significant, it should noted that these types are investments are not suitable for everyone. They are higher risk and more complex investments, sometimes with limited liquidity.
If you would like to know more about VCTs, or to discuss whether or not they are right for you, contact us on 01945 581937.
