The tax benefits of investing into a VCT

VCTs (venture capital trusts) enable individuals to invest into small, unquoted UK companies that have the potential for a high level of growth.

The government wants to encourage private investment into these types of businesses, which can help contribute to a thriving innovative and entrepreneurial economy, but which may find it difficult to attract conventional funding sources.

HMRC therefore offers attractive tax breaks to individuals who invest into a VCT and are comfortable accepting the associated risks of holding smaller, unproven firms that may or may not ultimately succeed in turning a profit.

These tax breaks come in the form of:

• 30% income tax relief for every pound invested into a VCT. The prerequisite is that the investor has or will pay relevant income tax in that given tax year and the investment must be held for at least five years. 

Example: Mr Smith invests £10,000 into a VCT. Providing he pays £3,000 in income tax in that tax year, he will receive £3,000 in income tax relief. Meaning he has purchased £10,000 worth of shares for £7,000.

• No income tax paid on dividends received from VCT investments.

Example: Miss Davies is a higher rate tax payer, so would normally pay 40% on any income received. If she receives £500 in dividends from her £10,000 investment, she will keep that full amount instead of paying tax on it and receiving just £300.

• No capital gains tax to be paid upon disposal of VCT shares. 

Example: Mrs Roberts is a higher rate tax payer and has used her £11,300 capital gains personal allowance for this tax year. After five years of holding her VCT shares, she sells them for £15,000, making a £5,000 gain from her original £10,000 investment. She would get to keep that full £5,000 gain instead of paying 20% and being left with just £4,000. Please be aware, capital gains are not guaranteed and your investment may go down as well as up in value.

For more information about VCTs and to find out what is open at the moment, please visit our VCT offers page. Or call Chris Morris on 020 7384 7300.

The downside of VCTs

• VCTs invest into very high-risk, smaller companies that may fail. 
• They are also very illiquid and you may have to hold them for longer than the minimum five-year investment period. 
• There is a risk that you will get back less than your original investment.

Important notice: VCTS
Please be aware that VCTs are long-term investments. VCTs usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. In addition, the level of charges are often greater than unit trusts and OEICs. Past performance is not necessarily a guide to the future. The value of investments, and the income from them, can fall as well as rise, due to market and currency fluctuations and you may not get back the amount originally invested. All our featured products should be regarded as medium to long-term investments. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.