Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.

A VCT is a publicly listed investment company that pools funds from individual investors and deploys this capital into a diverse portfolio of businesses. These businesses are typically unlisted or listed on the Alternative Investment Market (AIM) and are considered high-risk due to their early-stage nature. However, with greater risk comes the potential for higher returns, as investors have the opportunity to participate in the substantial growth of innovative companies.

There are three main types of VCTs. Understanding the different types can help you decide which one aligns best with your investment goals and risk tolerance.

1. Generalist VCTs – these VCTs invest in a broad range of industries and sectors, providing a diversified portfolio of early-stage and growth-oriented companies. They aim to spread the risk across various businesses, giving investors exposure to multiple markets and sectors. Generalist VCTs are suitable for investors who prefer a more balanced approach and do not want to concentrate their investments in specific industries.
2. Specialist VCTs – these VCTs focus on specific sectors or industries, such as technology or healthcare. These VCTs invest in companies operating within their chosen sector, offering investors an opportunity to support and potentially benefit from the growth of that particular industry. Specialist VCTs are suitable for investors who have a strong conviction in a specific sector’s potential and are willing to accept the risks associated with concentrating investments in that area.
3. AIM VCTs – these VCTs primarily invest in companies listed on the Alternative Investment Market (AIM). These companies tend to be smaller, high-growth businesses with the potential for substantial returns. However, they also carry a higher risk compared to more established companies. AIM VCTs are suitable for investors who are willing to accept higher risk in exchange for the possibility of higher returns and who are interested in supporting small, innovative businesses.

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. Please read our comprehensive guide to VCTs here.

A VCT must:

• Invest at least 80% in qualifying companies within three years, 30% in the first 12 months.
• 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 VCT holding must:

• Have gross assets of no more than £30m before investment.
• Receive no more than £10m of VCT or EIS investment in any 12-month period (£20m for ‘knowledge-intensive’ company).
• 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 (or fewer than 500 for a knowledge-intensive company).

CURRENT TAX YEAR’S ALLOWANCE: £200,000 – to qualify for income tax relief

An investor must:

• Be at least 18 years old
• Be a UK taxpayer
• Be paying the tax in the first place to qualify for the relief
• Hold the VCT for 5 years, or you will forfeit the tax relief (unless the disposal is to a spouse or civil partner)

• The maximum investment to qualify for income tax relief is £200,000 per annum
• 20% 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
• Tax relief does not need to be paid back upon death of the investor

Claiming 20% 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.
• If you sell shares in a VCT within six months of buying new shares in the same VCT, you will not be able to claim any income tax on these shares.
• Unlike an EIS, VCT shares do not qualify for relief from inheritance tax.
• 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 particularly during times of market stress.
• Investors should be aware that the sale of new shares in a VCT within five years of their subscription will require repayment of the 20% 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.

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk. You can read a full risk summary here.