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VCT investment criteria

As investments that receive considerable tax benefits, VCTs (and other schemes such as the Enterprise Investment Scheme) operate with strict investment criteria that the Government periodically reviews and adapts. The VCT rules must also comply with EU State Aid regulations.

Within three years of a VCT new fund raising, at least 70% of a VCT’s portfolio must be invested in ‘qualifying investments’ that meet a range of criteria:

  • Qualifying companies must be unquoted or AIM-listed UK trading companies, and cannot be subsidiaries nor have a controlling shareholder
  • Certain activities are specifically excluded from VCT investment such as generating energy; dealing in land, property and financial securities; farming; forestry, legal and accountancy services; managing guest houses, hostels and care homes; shipbuilding; coal and steel
  • Companies must have no more than 250 employees at the time a VCT invests (500 if the company is classified as ‘knowledge intensive’)
  • Companies in which a VCT invest must not have gross assets of more than £15 million at the time the VCT invests, or £16 million immediately after
  • A company cannot receive more than £5 million of VCT (or other state aided) investment in any 12-month period and there is an £12 million limit on the amount of VCT investment it can receive overall (rising to £20 million for ‘knowledge intensive’ companies)
  • VCT portfolios must be diversified. No holding can be more than 15% of the VCT portfolio  at the time of investment
  • Investments made by a VCT must be for the purposes of developing or growing a business and can no longer be used to buy someone else’s shares e.g. facilitating a management buy-out or funding an acquisition

What are ‘knowledge-intensive’ firms?

The 2015 Finance Act saw a number of adaptions to the VCT rules, including the introduction of more favourable criteria for knowledge-intensive companies. There are a number of criteria a company is required to meet to be classified as knowledge intensive but in broad terms a company must firstly be able to demonstrate that a significant proportion of its operating costs have been on research and development expenditure.  Additionally it must also satisfy either a skilled employee condition (at least 20% of the workforce has a higher education qualification and is directly engaged in R&D) or an innovation condition, which requires a VCT to demonstrate that its investment will primarily be used to create intellectual property.


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