For some investors, Venture Capital Trusts (VCTs) could present a way to tax-efficiently invest and support innovative businesses that may have high-growth potential. However, VCTs aren’t the right option for everyone. Read on to learn the basics you need to know if you’re thinking about using VCTs to invest.
The government introduced VCTs in 1995. They aim to provide a way to inject capital into small and emerging businesses.
According to the latest figures from HMRC, in 2021/22, VCTs issued shares to the value of £1,122 million – 68% higher than in 2020/21. Indeed, VCTs have grown in popularity in recent years and the amount of funds raised has more than doubled since 2009/10.
Venture Capital Trusts could provide you with a way to invest in start-up businesses
Start-ups and small, innovative businesses often have limited access to funding. VCTs are designed to provide a way for investors to support these businesses that may have the potential to grow quickly.
VCTs might also provide businesses with other support, such as guidance about how to optimise growth.
A VCT is a listed company that pools money from investors and uses it to invest in VCT-qualifying companies. So, rather than investing in one start-up business, your money is spread across several, which may help diversify your investment.
Some VCTs may specialise in specific sectors or industries to utilise their expertise more effectively.
In the 2023 Autumn Statement, chancellor Jeremy Hunt confirmed the government will legislate to extend VCTs to 2035.
You could receive up to 30% Income Tax relief by investing in Venture Capital Trusts
VCTs are high-risk investment opportunities. To encourage investors to take the risk of investing in small businesses, the government offers tax relief.
In 2023/24, you could invest up to £200,000 in VCTs and receive Income Tax relief of 30%. This means you could claim up to £60,000 of tax relief. You must hold the investment for at least five years to keep the relief.
You can only claim relief against the amount of Income Tax you pay, and you cannot carry forward unused Income Tax relief to future tax years.
In addition, any dividends paid by the VCT are not subject to Income Tax and gains are free from Capital Gains Tax (CGT).
If you purchase VCTs in the secondary market, there is no tax relief on purchase.
According to the HMRC figures, in 2020/21, VCT investors claimed Income Tax relief on £640 million of investment – a 10% increase on the previous year. The number of VCT investors who claimed Income Tax relief also increased by 9% to almost 19,500.
Venture Capital Trusts could be useful if you’re a high-risk investor
VCTs may be a useful option to consider if you’re a high-risk investor who has already used other tax-efficient allowances, such as the ISA annual subscription or pension Annual Allowance.
As well as the opportunity to benefit from tax relief, VCTs might be attractive because they:
· Provide a way to invest in potentially high-growth businesses
· Could help you diversify your wider investment portfolio
· Allow you to support British innovations by investing in start-up businesses.
Venture Capital Trusts are considered high-risk investments and aren’t right for many investors
While the tax incentives of VCTs may be attractive, they’re not right for many investors.
VCTs are a high-risk investment. Start-up companies are more likely to fail than established firms. As a result, if you invest through VCTs, there is a higher chance that you could lose your money and you may not get back the full amount you invested.
You also need to be prepared to invest for the long term. To retain VCT tax relief, you must hold the shares for a minimum of five years. So, it’s important to consider your long-term plans.
In addition, as the VCT market is smaller than that of traditional investments, it could be more difficult to sell shares. It may take more time, or you may have to accept a lower price than the value of the VCT.
Contact us to talk about tax-efficient ways to invest
VCTs are just one option if you want to invest tax-efficiently. It’s important you understand your options and what level of investment risk is appropriate for your circumstances. Whether you’re keen to invest in VCTs or would like to explore alternatives, we could help.
Please contact us to talk about your investment strategy and how to minimise your tax liability.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.
