VCTs – A Chance to Invest In UK Business

VCTs

For experienced investors looking to take a stake in new and emerging businesses, Venture Capital Trusts (VCTs) could prove an interesting and tax-efficient investment opportunity.

According to the Association of Investment Companies, the amount invested into VCTs in the 2013-14 tax year was almost £436 million, compared with a figure of just over £400 million for the previous year.

How Do They Work?

A VCT is a company with shares traded on the London Stock Exchange. It aims to make money by investing in smaller unlisted companies who are looking for finance to help them get their business off the ground. The managers of the VCT will usually make their investment at an early stage of the company’s development. As this can be a risky time for any business, it means that VCTs are attractive to wealthier, more established investors who understand the downside of an illiquid investment and who can afford to take a long-term view of their investment and accept the higher degree of risk involved.

The rules governing VCTs stipulate a maximum company value of £15 million and a maximum of 250 employees. The VCT managers aim to sell these companies within 3 to 7 years, with the profits paid to investors as tax-free dividends. The original capital is then reinvested into new businesses.

Investment Potential

As the economic recovery continues and interest rates are low, more and more new businesses are starting up. This means that the investment managers can choose from a wide range of potential investment opportunities drawn from many different
market sectors.

Tax Benefits

Since their launch in 1995, successive governments have encouraged investment in new enterprises, so new subscriptions to VCTs attract up to 30% income tax relief. It’s important to note that this is a tax rebate and so will be restricted to the amount of income tax paid (the shares must be held for five years to attract income tax relief). The maximum that can be invested is £200,000 per tax year, and gains are exempt from Capital Gains Tax and dividends are paid free of tax.
The taxation treatment may be subject to change

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.

 

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