A VCT is a company whose shares trade on the stock market and, rather like an investment trust, aims to make money by investing in other companies.
Venture Capital Trusts, or VCTs, are closed ended investment companies that specialise in investing in new companies or young companies that the investment managers believe have the ability to offer rapid growth. As well as providing these businesses with capital, the VCT will often provide guidance and advice to optimise growth.
VCTs are essentially high risk investments as they often provide funding to companies that are starting out, and which may only have limited access to alternative sources of funding. VCTs will generally invest in a limited number of these companies, so there is also the risk of a portfolio concentrated on a small number of investments.
VCTs tend to specialise in specific sectors, or industries. This could be as specific as, for example, funding nursery schools or green energy projects, so the risk of investment may be increased by events that impact the particular sector focused on, alongside general market events.
For these reasons VCTs are generally considered to be appropriate for very experienced investors who have large investment portfolios.
However, VCTs play an important role in the economy and so they offer significant tax advantages. When VCTs are purchased at launch, or during subsequent share class issues, investors receive up to 30% tax relief on their VCT subscriptions of up to a maximum of £200,000, subject to holding the investments for a minimum of five years. Any dividends paid by the VCT are also not subject to income tax. Any capital gains are also free of capital gains tax (CGT).
If purchased in the secondary market, once the shares are listed on the London Stock Exchange, there is no tax relief on the purchase (although these do count toward the £200,000 cap) but gains are free of CGT, and no tax is payable on dividends. The tax benefits are attractive, but this is to compensate for the high level of investment risk being taken and for the potential losses that an investor is more likely to sustain.