What are VCTs, and are they an appropriate investment for me?
If you are over the age of 18, you can obtain income tax relief at 30% on investments up to £200,000 into qualifying VCTs each tax year. As an example, if you were to invest £100,000 into a VCT, you would be able to claim £30,000 off your income tax liability in the relevant tax year.
As well as the income tax reduction, any dividends payable from the investments within VCTs are tax-free.
VCTs also offer capital gains tax relief, since all gains that arise from the sale of shares are exempt from capital gains tax.
So, what are VCTs?
Broadly speaking, Venture Capital Trusts (VCTs) were introduced in 1995, and are approved companies who invest in unlisted trading companies. They were set up as a means to encourage investments into new UK businesses to support their development.
As the underlying companies are young, this presents a much higher level of risk compared to listed companies, as their viability is less certain, and the chances of failure are more likely. On the flip side, investing in small companies could also provide the opportunity for higher growth over a shorter period when compared to listed companies, who tend to grow at a more gradual pace.
What do I need to be aware of?
There is a minimum holding period for VCT shares, in order to retain the income tax relief. If you were to withdraw your shares within 5 years, the income tax relief would be withdrawn.
Due to the nature of the underlying companies being relatively young, the Venture Capital market is high risk and also less liquid than other stock market investments. This means that you could lose a large amount of your capital.
The income tax relief of 30% will be limited to your actual income tax liability in the tax year of investment.
How can VCTs tie in with my wider financial planning needs?
As VCTs are not listed on the main stock market, they could provide an additional level of diversification within your overall portfolio. Whilst the share prices of listed companies will be impacted by the stock market fluctuations, the share prices of smaller companies tend to be reflected by the individual performance of the underlying business. Therefore, not only are VCTs a sound diversifier within a portfolio, but they are also a source of tax-free income.
Should I invest into a VCT?
In short, although high risk, VCTs can be a very beneficial investment, especially to those who have a large income tax liability, and/or have maximised their available allowances with alternative products (such as pensions and ISAs). They can provide a tax-efficient supplementary income, as well as a great potential for significant capital growth.
Small, unlisted companies in the earlier stage of their development carry greater risk of failing when compared against larger, fully listed companies.
Shares in unquoted companies or companies admitted to trading on AIM may be higher risk than companies listed on the London Stock Exchange Official List. Investments in shares in unquoted companies are not readily marketable and the timing of any realisation cannot be predicted.