Introduction to Venture Capital Trusts

A Venture Capital Trust (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.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.

VCTs are essentially high-risk investments as they often provide funding to companies that are starting out, and may have limited access to alternative sources of funding. VCTs will generally invest in a limited number of these companies, so there’s also the risk of a portfolio concentrated on a small number of investments.

VCTs are closed-end investment companies that specialise in investing in new or young companies that they 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.

They tend to specialise in specific sectors or industries for example, funding nursery schools or green energy projects. This means the investment risk might be increased by events that impact the particular sector, as well as general market events.

For these reasons, VCTs are generally considered to be appropriate for very experienced investors who have large investment portfolios.

VCTs play an important role in the economy and so they offer significant tax advantages. When they’re purchased at launch, or during subsequent share class issues, investors receive up to 30% tax relief on their VCT subscriptions, up to a maximum of £200,000 and subject to holding the investments for at least five years. Any dividends paid by the VCT are also not subject to income tax and capital gains are free of Capital Gains Tax (CGT).

If VCTs are purchased in the secondary market, once the shares are listed on the London Stock Exchange there’s no tax relief on the purchase (although these do count toward the £200,000 cap) but gains are free of CGT, and there’s no tax payable on dividends.

The tax benefits are attractive to compensate for the high level of investment risk being taken and for the increased potential losses.

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The value of investments can fall as well as rise. You may get back less than you invest.

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