Venture Capital Trusts (VCT) – By investing in a VCT you can claim income tax relief of up to 30% on the amount that you have invested. Meaning that if you invested £15,000 into a VCT you could reduce your tax bill by up to £4,500!

What is a Venture Capital Trust (VCT)?

A Venture Capital Trust (VCT) is a type of investment vehicle designed to encourage investment in small, unlisted UK companies. The idea is to provide capital to early-stage businesses that may otherwise struggle to attract funding.

VCTs pool funds from individual investors to invest in a portfolio of early-stage companies, often across a range of sectors. These investments are typically high-risk because the companies they back are in their early stages and may not yet have a proven track record.

But what do I get in return for this?

VCTs offer investors some attractive tax reliefs such as:

• Income Tax Relief:

Investors can claim back 30% of the amount they invest in VCTs up to £200,000 each tax year. If for example you invested £25,000 into a VCT, you could receive tax relief of £7,500.

• Tax-Free Dividends:

Dividends received from VCTs are free from income tax, which can be especially attractive for those looking for income generation from their investments.

• Capital Gains Tax (CGT) Exemption:

Any gains made from the sale of VCT shares are free from Capital Gains Tax. This can be a significant benefit, especially for those in higher tax brackets (a rate of 24%).

Furthermore, there is the possibility for high growth on the investment, given that these are early-stage companies, there is the potential to grow.

The Risks of Investing in VCTs

Unfortunately, whilst the tax benefits of VCTs are appealing, they come with a set of risks that investors must carefully consider. Below are some of the key risks involved:

• High Risk of Loss:

Given that VCTs primarily invest in small, early-stage businesses that often lack the stability and proven track record of larger, established companies, these businesses can fail, and the value of your investment may decrease as a result. The potential for high returns exists, but it’s important to acknowledge the high probability that some investments will not perform well, or at all and that investors may not get back the full amount they invested and if the company fails, they may potentially lose the value of that investment entirely.

• Illiquidity:

VCT shares are typically not easily tradable on the open market. This means that if you need to sell your VCT shares, you may struggle to find buyers or have to sell at a loss. As the shares are often in early-stage businesses, their value can fluctuate significantly, and finding buyers may be difficult, particularly during times of market downturns.

• Volatility:

The value of VCTs can be highly volatile (Their value rises and falls sharply) so if you’re looking for stability in your investment, VCTs may not be the right fit.

• Long-Term Commitment:

VCTs are generally designed to be long-term investments. You’ll need to commit your funds for several years, often five or more, before you can access the full benefit of the tax reliefs. This means you should not invest in VCTs if you need access to your money in the short term. In addition to this, if you sell your shares within 5 years, you would have to repay HMRC, the tax-relief you claimed.

• Complexity of Selecting a VCT:

Not all VCTs are the same. Some focus on specific sectors or stages of investment, while others have a more general approach. The track record of the VCT’s management team and their ability to pick winning investments is crucial. Without proper due diligence, you could end up investing in a VCT that underperforms or takes on too much risk. Furthermore, any of the companies invested in, could lose their VCT status and therefore the associated tax reliefs.

Should You Invest in a VCT?

VCTs offer an attractive combination of tax reliefs and the potential for high returns. However, they come with significant risks, especially when it comes to the performance and liquidity of the underlying companies.

If you’re considering investing in a VCT, it’s crucial to understand how it fits into your personal financial goals and risk profile. As a financial adviser, I can help you assess whether a VCT is the right investment for you and guide you through the selection process. Please feel free to contact us on 01935 848764.

Warning: The information contained in this article is for information purposes only and does not constitute advice. Decisions should not be based solely on any information contained within the website, individual advice should be sought.

• Capital risk – may not get back as much as originally invested.
• Income risk –income level achieved may be less than you had expected.
• Liquidity risk – may not be able to access funds when they are needed.
• Past performance is not a reliable indicator of future returns.