Venture Capital Trusts (VCTs) are investment companies listed on the London Stock Exchange. They were first launched in 1995 as a collaboration venture between HM Government and the trade association of the UK private equity industry, the British Venture Capital Association (BVCA).
VCTs are designed to attract UK private investors to invest in a diversified portfolio of unquoted and AIM-traded growth companies whose trading activities are predominately based in the UK. VCTs are normally managed by specialist investment managers under the governance of an independent Board of Directors.
Several tax incentives are available to UK income tax payers who invest in VCTs.
Investors must weigh these tax benefits against the withdrawal of such benefits and the risks inherent to investing in smaller companies.
VCT investment is only suitable for investors who can evaluate the risks and merits of such investment, and who have sufficient resources to bear any loss that might occur. Most investors invest in VCTs on the advice of professional advisers who are more aware of the risks and returns possible from VCTs.
Advantages of investing in VCTs
Venture Capital Trusts are investment companies listed on the London Stock Exchange and are particularly attractive to tax paying individual investors who invest in new VCT shares and hold them for at least five years. Furthermore, VCTs allow investors to invest in a portfolio of unquoted companies, as well as AIM quoted companies, while benefiting from the liquidity provided by the listing of the VCT's shares. The VCTs managed by Albion have a policy of buying back their own shares in the market, subject to certain criteria and the LSE's regulations, to ensure liquidity.
Following the Finance Act 2007, the following tax benefits are available to UK residents aged 18 or over investing after 6 April 2007:
(i) Tax-paying investors receive an income tax rebate at 30% on the amount invested, thus reducing the effective net cost of the investment to 70 pence for each £1 invested, provided the shares are held for at least five years and the investor has paid the tax;
(ii) Dividends paid by a venture capital trust are free of income tax;
(iii) There is no tax on capital gains made upon disposal of shares in a VCT; and
(iv) Capital gains made by the venture capital trust on its underlying investments are free of corporation tax and, unlike an ordinary investment trust, these gains may be distributed by way of dividends to investors.
Income tax relief for investors is limited to subscriptions of up to £200,000 per person per tax year. For more information contact your financial adviser.
Be aware of policy changes
The VCT tax reliefs can vary depending on HM Government policy.
In order to maintain its status under Venture Capital Trust legislation, a VCT must comply on a continuing basis with the provisions of Section 274 of the Income Tax Act 2007 as follows:
(1) The Company’s income must be derived wholly or mainly from shares and securities;
(2) At least 70 per cent. of the HMRC value of its investments must have been represented throughout the year by shares or securities that are classified as ‘qualifying holdings’;
(3) At least 30 per cent. by HMRC value of its total qualifying holdings must have been represented throughout the year by holdings of ‘eligible shares’. For funds raised after 5 April 2011 the figure is 70 per cent;
(4) At the time of investment, or addition to an investment, the Company’s holdings in any one company (other than another VCT) must not have exceeded 15 per cent. by HMRC value of its investments;
(5) The Company must not have retained greater than 15 per cent. of its income earned in the year from shares and securities;
(6) The Company’s shares, throughout the year, must have been listed on a regulated European market;
(7) An investment in any company must not cause that company to receive more than £5 million in State aid risk finance in the 12 months up to the date of the investment, nor more than £12 million in total (£20 million for a “knowledge intensive” company);
(8) The Company must not invest in a company whose trade is more than seven years old (ten years for a “knowledge intensive” company) unless the Company previously received State aid risk finance in its first seven years, or a turnover test is satisfied;
(9) The Company’s investment in another company must not be used to acquire another business, or shares in another company; and
(10) The Company may only make qualifying investments or certain non-qualifying investments permitted by Section 274 of the Income Tax Act 2007.
1. If a VCT fails to meet the qualifying requirements for a VCT, this could result in:
(i) investors in that VCT being required to repay the 30 per cent. income tax relief received on subscription for new issue shares; (ii) loss of income tax relief on dividends paid (or subsequently payable) by the VCT;
(iii) a potential liability to tax on capital gains on a disposal of shares in a VCT;
(iv) loss of tax relief previously obtained in relation to corporation tax on capital gains made by the VCT;
(v) failure to meet the qualifying requirements could, in addition, result in a loss of the listing of the VCT’s shares.
2. The levels and bases of taxation may change and such changes may be retrospective.
3. The definition of a VCT qualifying investment may change, and the conditions relating to the maintenance of that qualifying status may also be subject to alteration, which could impact on the level of the VCT’s qualifying holdings.
4. The sale of new issue shares within 5 years of their subscription will result in some or all of the 30 per cent. income tax relief available upon acquisition of those new issue shares becoming repayable. On this basis, investing in new issue shares should be considered a long-term investment.
5. Any realised losses on the disposal of shares cannot be used to create an allowable loss for capital gains tax purposes.
1. The value of the shares may go down as well as up and an investor may not receive back the full amount invested.
2. No guarantee is given or implied that the investment objectives or the realisation strategies set by the VCT will be achieved. Furthermore, the VCT’s ability to obtain maximum value from its investments (for example through sale) may be limited by the requirements imposed in order to maintain the VCT status of the VCT (such as the obligation to have at least 70 per cent. by value of its investments in Qualifying Investments).
3. The VCT’s investments are and will be in companies whose securities are not publicly traded or freely marketable and may, therefore, be difficult to realise and more volatile than the securities of larger, longer established businesses.
4. Investee companies include younger, fast-growing, unquoted companies undergoing significant change. Such businesses are usually exposed to greater risks than lower growth businesses and therefore involve a higher degree of investment risk as they are more fragile and may not produce the hoped-for returns.
5. The success of some investments may be based on the ability of investee companies to establish, protect and enforce intellectual property rights, rights being broad enough to protect proprietary interests and the rights not infringing third party patents.
6. A charge given to the VCT over an asset by a portfolio company may not provide full capital protection for an investment.
7. A number of the VCT’s investments may be sensitive to any further downturn in the economic environment.