We are often asked by our clients about the tax advantages of Venture Capital Trusts (VCTs) and how it may reduce their tax liabilities. Therefore, we thought we would take a quick look at how VCTs can be a tax efficient investment for those who are willing to accept some risk.
What is a VCT?
A VCT is a company whose shares are listed on a UK recognised Stock Exchange. They aim to make money by investing in other companies which are starting up or still in their infancy, but which they believe will experience rapid growth, and thus high returns. VCTs might invest in unquoted companies across a range of sectors, or may specialise in investments within a specialist sector, such as technology or healthcare.
What are the tax advantages of a VCT?
Those looking to invest in VCTs may be able to benefit from a number of tax advantages where the necessary conditions are satisfied.
Income Tax Relief
Where an individual invests in a VCT, they can receive up to 30% income tax relief. For example, if you were to invest £40,000 in a VCT, then you would be able to reduce your income tax liability by £12,000 (30% x £40,000). However, it is important to remember that this is only available where the shares in the VCT are new shares (i.e. purchased at launch or on subsequent share issues). In addition, the income tax relief is limited by the tax paid or tax liability due. If your tax liability for the year was £8,000, then the income tax relief for the VCT investment would be limited to £8,000. In addition, in order to benefit from this income tax relief, the individual must hold the investment for a minimum of five years. There is also a permitted maximum investment amount of £200,000 per year (so the maximum income tax relief to be had is £60,000 per year (£200,000 x 30%).
Income Tax Relief on Dividend Income
Any dividends paid by the VCT are not subject to Income Tax, subject to the permitted maximum investment amount of £200,000 per annum. Individuals must also be at least 18 years old in order to benefit from this relief. Unlike the income tax relief, the relief on dividend income is available on VCT shares which are purchased in the secondary market (i.e. not at launch / subsequent issues).
Capital Gains Tax Relief
Any growth experienced by the investor in their VCTs is tax free. Yes, that’s correct – no capital gains tax on profits on disposal of the VCT shares! Again, in order to benefit from this tax advantage, investors must be over 18 years of age. In addition, this relief is available on the purchase of shares in the secondary market. However, please note that any losses made on disposals of shares held in VCTs cannot be used to offset gains made elsewhere when calculating your CGT liability.
All of the above reliefs are only available to individuals, not companies, trustees or others.
And what about the downsides?
All of these tax advantages sound absolutely fabulous, and they are! However, these tax advantages exist in order to encourage investment into a vital part of the economy – new and young companies. These tax incentives are necessary as such companies are much higher risk than established companies with a track record of profit-making. As with all shares, they may increase in value, but they may also decrease in value, and this could lead to you losing some, or even all, of your money. Therefore, we would always recommend that you speak to a trusted Independent Financial Advisor before investing in a VCT.
Need more help on VCTs? We would love to advise you further on the tax advantages of VCTs, so if you have any questions, please do not hesitate to contact us. Head to the Get Started page or email us – hello@pinkpigfinancials.co.uk
