Venture Capital Trusts
What is a VCT?
A VCT is a Venture Capital Trust.
VCTs invest in a portfolio of unlisted or AiM companies (or both) in order to aid their development into a successful business and realise gains for investors.
A VCT must:
- Invest at least 70% in qualifying securities within three years.
- Invest at least 30% in ordinary shares within three years and at least 10% of each holding must be in these shares.
- Derive its income wholly or mainly from shares or securities.
- Have no holding in one company representing more than 15% of the portfolio's overall holding.
- Quote its ordinary shares on the London Stock Exchange.
- Retain no more than 15% of its income.
A qualifying holding must:
- Have gross assets of no more than £15m before investment.
- Receive no more than £5m of VCT or EIS investment in any 12 month period.
- Undertake a "qualifying trade" which generally excludes property, hotels, nursing homes, dealing in land or commodities, financial or legal services, leasing etc.
- Have no more than 250 full-time employees at the time of investment.
VCT Share Classes
New Launch shares are simple and clean but have no track record and the portfolio takes time to establish.
Top-Up shares offer participation in a mature portfolio with a clear track record. However, availability may be restricted.
'C' or 'conversion' shares separate newly purchased shares from existing shares to prevent NAV and return dilution for existing shareholders. These shares do not participate in returns from the Ordinary share portfolio until the shares are converted.
VCT Taxation 2012/13
The maximum investment is £200,000.
30% Income Tax relief.
All dividends are free of income tax.
All gains are free of capital gains tax.
Gains within the VCT are free of Corporation Tax.
Tax benefits require a five year holding period.
What are the charges?
Usually an upfront charge of 5.5%, this is reduced if you choose to invest in a VCT on an execution-only basis via Chelsea. The annual running costs of a VCT can be high but are usually capped at 3.6%. Annual costs include Director's fees, fees for taxation advice and registrars, any trail commissions payable to the sponsor and broker as well as the Investment Manager's fee.
As is customary in the venture capital industry the manager will be entitled to receive a performance related incentive based upon returns made to shareholders. These can vary greatly from manager to manager so it is worth reading the criteria for each one carefully before investing.
How do I claim the 30% income tax relief?
This is very straightforward. When you complete your tax return, there is a VCT section whereby you will then be repaid the income tax by the HMRC via your tax code, as a lump sum rebate or if self-employed, a reduction in Schedule D tax.
- Please note that a failure by the manager to meet the qualifying requirements for a venture capital trust could result in the loss of any tax relief that may be available.
- Investments in unquoted, AIM-traded and OFEX-traded companies by their nature involve a higher degree of risk than investment in the main market. In addition, the market for stock in smaller companies is often less liquid than that for stock in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such stock.
- Investors should be aware that the sale of new shares in a VCT within five years of their subscription will require repayment of the 30% income tax relief available upon investment to the extent of the amount received from such a sale. Hence, an investment in a VCT is not a short or medium term investment.
- The past performance of the VCT and/ or investments managed by the Investment Adviser should not be regarded as an indication of the future performance of the VCT.
- The value of shares within a VCT may go down as well as up and shareholders may not receive back the full amount invested.
- The secondary market for shares in VCTs is limited so you should consider your investment as long term. You may find it difficult to sell your VCT shares after five years as there may be a shortage of buyers and trading in the shares may be at a discount to their Net Asset Value (NAV).
- Whether or not a VCT is profitable, it will need to meet certain fixed costs, including organisation expenses, ongoing administrative and operating expenses.