When it comes to investing, you have many options available to choose from. One popular strategy is to use Venture Capital Trusts (VCTs). It is in many ways similar to an investment trust and could provide you with beneficial tax opportunities. Here is a look at VCT investments.
What is a VCT?
A VCT is a trust listed on the London Stock Exchange. It raises money from wealthy investors and uses these investments to support innovative, and often privately-owned companies. VCT investments are usually made on a wide variety of sectors and they range from early-stage tech companies to niche manufacturers, for example.
HMRC has set rules that companies must qualify in order to receive VCT funding. This includes things like:
- Carrying out a qualifying trade, which actually includes most trades but excludes those HMRC doesn’t deem in need of extra support.
- Being a relatively small company, typically with gross assets of £15 million or less and fewer than 250 employees.
- Being a relatively new company, usually with less than seven years of trading.
VCTs must invest a minimum of 80% of the money they raise to companies.
The different types of VCTs
There are different kinds of VCTs depending on the kind of companies they invest in. The major differences between VCTs are:
- Investment focus – the majority of VCTs are ‘generalists’, investing in a variety of sectors but there are also ‘specialists’, which have a specific focus in terms of industry or sector.
- AIM exposure – VCTs can invest in unquoted or listed companies on AIM or privately-owned companies.
- Lifespan – generally VCTs are set up without an ‘end date’ but there are some ‘limited time’ VCTs that are wound up after a minimum holding period.
How to make VCT investments
VCT investments are available to anyone with enough money to invest. Investing in VCTs is usually done through:
- Buying shares in new offers, usually through a broker.
- Buying shares on the secondary market, which can mean a discount in price. However, you won’t get the upfront tax break available with new shares.
When considering which VCT to invest in, it’s a good idea to consult a broker and check out the NAV Total Return figures. This is often a better indicator of a VCT’s performance outside of the share price. Furthermore, VCTs also publish performance figures in its Annual and Interim reports.
You can then sell your VCT shares on the open stock market, although they are usually sold at a lower price and significantly lower value than the underlying asset. VCT managers also periodically offer to buy back shares.
How much can you invest in VCTs?
The minimum investment will depend on the VCT but generally, it falls around £5,000. However, there are VCTs with smaller and sometimes higher minimum requirements.
The maximum amount to invest is £200,000 per tax year. It is possible, in theory, to invest more, but that would mean you don’t qualify for the tax benefits on the excess.
What are the risks of VCT investments?
As with any investment, you are not guaranteed to make money and, in fact, you could lose your investment. The investment risks with VCTs tend to be higher than other stock market investments due to their nature of investing in small companies at the start of their business. This makes them slightly more volatile.
VCT investments are long-term investments. They are recommended for experienced investors and those who do not require immediate liquidity. If you can withstand a potential loss and you are looking for a long-term investment, VCTs can be a great option. They are especially good when you want to receive tax-free income, perhaps as you are preparing for retirement.
What to know about the tax treatment of VCTs?
The big reason behind the popularity of VCTs is the tax cuts it provides investors with. Upfront and ongoing tax reliefs include:
- Up to 30% upfront income tax relief when investing up to £200,000
- Tax-free dividends
- Tax-free growth
Claiming tax-relief is easy. You can claim the income tax relief when you’re filing your tax return and you don’t need to declare any tax-free dividends you receive. HMRC doesn’t require you to send your tax certificates for the VCTs when claiming tax relief. However, you have to keep them safe in case they require them, for example, during an audit.
It is important to remember that for the benefits to stand, you need to hold your VCT shares for at least five years!
You should also be aware that VCT investments are typically subject to inheritance tax, just like any other shares you buy on the stock market. If these shares are transferred to your heirs, they will continue to benefit from the tax-free dividends. Furthermore, if you die within five years of investing, any tax relief you have received will not be withdrawn.
Get help with your wealth management
The decision to invest should always be taken carefully and with enough attention paid to different strategies. Each situation is unique and the benefits of VCT investments might be different to you than to someone else. For example, you might find SEIS and EIS investments more beneficial in your situation. That is why discussing your wealth management options with a financial specialist is always a good idea.
We at Devonshire Green have a long history in helping clients look after their wealth. Together with our professionals, we can consider your investment strategies to make sure you make the most with your money and take advantage of proper tax planning. Contact us today to discuss VCT investments and other suitable options for you.