Whether you’re new to investing or have been an avid investor for some time, you may not have come across Venture Capital Trusts (VCTs). They tend to be used as a tax-efficient way of investing when someone has reached their annual allowance (the maximum amount that can be deposited into one’s pension pot each year) or is specifically looking for additional tax-efficient options.
What are VCTs?
They’re specific investment companies listed on the London Stock Exchange (LSE) that exist to pool investors’ money together and use it to invest in early-stage, entrepreneurial UK businesses.
The VCT scheme was set up by the government in 1995 as a way to encourage indirect investment in these smaller, often higher risk trading companies.
There are various criteria a business must meet to qualify for VCT investment. They must also be approved by HMRC in order for investors to receive tax relief.
The investment criteria includes having fewer than 250 full-time employees or 500 employees if the company is Knowledge Intensive (KI) when shares are issued. There are also limits on the gross amount of assets the business can hold.
Are there tax benefits when investing in VCTs?
Yes, some. VCTs are now an established area of the UK investment landscape. As a way of recognising the risk taken on when paying into these newer, fledgling businesses the government introduced certain tax-reliefs.
The VCT may be exempt from Corporation Tax on any capital gains arising on disposal of its investments. Any capital gain on disposal is free of Capital Gains Tax. The maximum amount that you can invest is £200,000 and those investing could be eligible for up to 30% income tax relief on up to this maximum amount. As an example, if you invest £100,000, you could get £30,000 back in relief to offset your income tax bill. This makes VCTs an attractive tax-efficient investment option.
The minimum amount that can be invested varies between VCTs but typically could be around £5,000.
There are different types of VCTs so it’s worth researching or speaking to a financial adviser depending on your own investment goals.
Can they help the economy?
Possibly. Between the scheme’s inception and April 2021 around £9.4 billion has been invested into VCTs.
They were traditionally seen as a last resort in terms of an investment route for those who had used up their personal allowance. However, today VCTs often produce reliable returns and provide a boost to British businesses.
This year, the Financial Times reported that over the last decade the top 20 VCTs have at least doubled investors’ money.
Further to this they may play a part in economic recovery following recessions or periods of slow growth. One example of this can be seen following the 2008 financial crash. VCT activity experienced a fall of around £80 million to £150 million during the 2008/09 financial period. However, it then garnered an increase up to £340 million the following financial year.
Also, considering the economic struggles experienced globally throughout the pandemic VCTs raised a record £1.3 billion during the financial year 2021/22 – a 65% increase on the previous financial year.
Many of the companies which VCTs invest in are classified as SMEs. SMEs make up around 99% of all UK businesses, therefore investment in VCTs may provide a big boost in job creation and the economy as a whole.
Keeping all this in mind, investors should be aware that VCTs are high-risk investments and there may be no market for the shares should they wish to dispose of them. If you’re ever unsure, it’s always best to seek sound financial advice.