Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

VCTs reach 20th anniversary – a grown up scheme for smaller companies

This month marks the 20th anniversary of the creation of Venture Capital Trusts (VCTs); the brainchild of then Conservative Chancellor Norman Lamont in the 1995 Finance Act.

Jason Hollands Jason Hollands
21 April 2015

Although the rules and tax reliefs for VCTs have undergone periodic changes since then, it is worth noting that VCTs have enjoyed the continued support of both Conservative and Labour governments, who have recognised the important role they play in providing small, UK growth businesses with a source of finance.

VCTs are investment companies, listed on the stock exchange, which invest in small, unquoted or AIM listed businesses that meet certain criteria. To encourage investment into these types of businesses, which are regarded by many as the backbone of the UK economy, the Government provides investors in VCTs with generous tax breaks to incentivise them for the inherently high level of risk when investing in small, illiquid companies. Before investing, you should familiarise yourself with the Important Information at the bottom of this page.

The key tax advantages include a 30% Income Tax credit on investments into new share issues from VCTs, providing the investor has incurred an equivalent Income Tax liability during the tax year the Income Tax credit is being claimed and that the investor also holds the VCT shares for at least five years after being allotted the shares. Once invested, VCT dividends and gains are tax free.

Data released by the Association of Investment Companies on 20 April 2015 shows that VCT dividends are at an all-time high.* Like any share dividend income, it is important to understand that this isn’t guaranteed, but such levels of income are attractive compared to those found on other types of investment in the current environment, especially when you consider they are tax-free.

The last two years have seen very strong levels of new fund raising for VCTs given the specialist nature of these investments. A large part of this is likely to be due to the yields available at a time when income investments are in demand but also, we believe, because of significant reductions made in the pension lifetime allowance – the amount that an investor can accumulate in pensions, above which a hefty tax charge is applied. The pension lifetime allowance has been progressively reduced in stages from £1.8 million in 2010, to £1.25 million last year and as the most recent Budget revealed, will be cut further to £1 million in April 2016. This means that wealthier investors with significant pension funds are increasingly looking at alternative tax-efficient investment allowances, including VCTs.

We therefore expect investor demand for VCTs to remain strong. However, it is also the case that VCT supply is limited as managers will not want to raise more cash than they are comfortable they can find suitable companies to invest in: after two strong years of VCT new fund raising some managers already have ample cash to invest so may not need to attract significant new funds over the coming year. The good news is that that there are still several decent quality VCTs with some capacity left from offers launched in the previous tax year including Puma 11, Downing ONE and Unicorn AIM. To find out more about which VCTs remain open for new investment, click here.

* http://www.theaic.co.uk/aic/news/press-releases/vct-20th-anniversary-sees-dividends-at-an-all-time-high

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not a guide to future performance. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.