Venture Capital Trusts (VCTs)
Considering investing in a Venture Capital Trust (VCT), but you’re unclear on the benefits, risks and tax relief? At Clear Solutions, our team are highly experienced in this area of investing – please see our guide to Venture Capital Trusts below:
What are VCTs?
Venture Capital Trusts are retail investment products. They are pooled investments where a number of investors buy shares through individual subscriptions, creating enough money to make the investment opportunity possible. Venture Capital Trusts were launched by the Government in 1995 to encourage individual investors to invest in small unlisted UK trading companies, i.e. companies whose shares, stocks, debentures (a long-term security yielding a fixed rate of interest) or other securities were not available to be bought or sold publicly. In return for some generous tax breaks, investors were, and still are, incentivised to invest in Venture Capital Trusts.
Why small companies?
The UK has moved away from a large industrial economy based on large-scale manufacturing. Growth is steadily increasing in small to medium-sized enterprises (SMEs). This vital part of the economy has been recognised by successive governments to have the most potential in sustaining UK GDP. However, SMEs tend to suffer from a lack of seed capital or long-term financing. Since the credit crunch, retail banks have been more reluctant to lend to SMEs, which has resulted in these companies seeking private finance as a route to fund further growth. Such companies can apply for Venture Capital Trust investment money.
How is a VCT structured?
Venture Capital Trusts used to be companies that were listed on the London Stock Exchange. From April 2011, Venture Capital Trusts are now companies admitted to trading on a regulated market. A regulated market is one named as such by the EU, covering markets in EU and EEA countries.
Similar to investment trusts, Venture Capital Trusts are run by fund managers. Investors can subscribe for (or buy) shares in a Venture Capital Trust, which in turn then invest in trading companies, providing them with funds to help them develop, grow and expand. The Venture Capital Trust provider will issue a prospectus inviting investors to subscribe to its latest issue of shares. This issue must be approved by HMRC.
What are the tax benefits?
Income Tax relief 30% – available on a maximum investment of £200,000.
Tax-free income If the VCT shares pay dividends, these distributions are tax-free.
No Capital Gains Tax On the sale of the shares.
What are the risks?
There are two main risks relating to Venture Capital Trust investments:
You could lose all or some of your invested money. By the very nature of Venture Capital Trusts, investing in small or start-up companies who are looking to fund their businesses further, carries a greater risk than investing in more mature and established companies.
To mitigate this risk, Venture Capital Trust companies will try to:
- Spread investor’s money across a number of different companies.
- Invest in more mature or lower risk businesses or those that own real assets, e.g. property
- Carefully select companies following a rigorous process of due diligence.
- Maintain 30% of the Venture Capital Trust fund in cash deposits, fixed-interest securities or quoted shares.
There may not be a market to sell your Venture Capital Trust shares. An investor must retain his Venture Capital Trust shares for a minimum of 5 years to keep the 30% income tax relief given. The second-hand market for these shares may be limited, especially as the income tax relief is not given to the purchaser.
To mitigate liquidity risk, Venture Capital Trust companies will try to:
- Offer to buy back their own shares at a specified date in the future if certain conditions are met.
- Structure the Venture Capital Trust as a planned exit or limited life offering.
What kinds of Venture Capital Trusts are there?
Some of the basic types of Venture Capital Trusts include:
- Generalist Venture Capital Trusts
Generalist Venture Capital Trusts spread investments between AIM listed companies and unlisted companies. They often have a policy of investing in companies that are already or very nearly profitable. The objective is to support companies with strong management and business models, that are in or entering an expansionary phase, and can therefore promise growth for their investors.
- Specialist Venture Capital Trusts
This type of Venture Capital Trust invests mainly in a specialist sector or a specific market. Sectors could include technology, media, leisure, healthcare or low carbon, alternative energy businesses.
- AIM Venture Capital Trusts
AIM Venture Capital Trusts invest in companies that are quoted on the Alternative Investment Market (AIM) index. AIM is an exchange on which smaller companies’ shares are traded. While it is easier to track the performance and liquidity of the underlying investment via its quote on AIM, only the smallest AIM-listed companies are likely to fall within the maximum size of enterprise, which Venture Capital Trusts are allowed to subscribe to.
Did you know that Clear Solutions Wealth & Tax Management Ltd was shortlisted in 2015 and 2016 for the Growth Investor Award – Financial Adviser of the Year award? Recognising individual financial advisers who actively promote alternative investments, such as Venture Capital Trusts and Enterprise Investment Schemes, this award is judged on how companies like ourselves educate themselves, how we apply our expertise to add value for our clients, and what we do to maintain a consistently high level of advice on tax-efficient investments.
Please read the regulatory Health Warning below regarding investments. This is part of our good practice approach with all our current and potential clients, and reflects how seriously we take our duty of care and responsibilities at Clear Solutions.
INVESTOR HEALTH WARNING:
We strongly recommend that anyone attracted solely to this investment solution for tax relief should remember that it is an investment which means you can lose your money. We believe it makes sense to seek advice from a suitably qualified investment professional with appropriate professional indemnity in place and proven expertise in this field.
Trust us… we’re experts
Our Advisers hold Chartered and Certified qualifications, ranking amongst the highest in the profession. Our highly qualified team of experts are above the FCA minimum standard for advisers. In 2008, we were the first joint practice to be awarded the new British Standards ISO 22222 International Financial Planning Standard by the Chartered Insurance Institute. Our Managing Director was asked to be an assessor of the new standard helping to disseminate ‘best practice’. This measures the ability to deliver a consistent holistic financial planning service to an extremely high technical standard. In 2013, we became the only firm to be awarded the BS85777 accreditation by the Chartered Insurance Institute.