Venture Capital Trusts (VCTs)

What is a VCT?

A Venture Capital Trust is actually a limited company, which itself, in turn, invests in small companies.  Venture Capital Trusts therefore provide capital finance for small expanding companies with the aim of making capital gains for investors.  The Venture Capital Trust is run by an experienced fund manager and builds up a portfolio of investee companies, providing the investor with a spread of risk. For example, an investor in a £40m size Venture Capital Trust may typically find his money invested in between 30 to 40 companies. Venture Capital Trusts can usually be separated into three different types; Alternative Investment Market, Technology & General.  Some trusts invest in a combination of all three areas.  All income and capital gains are paid free of tax.  Venture Capital Trusts are higher than average risk and can be bought via an IFA, stock broker or direct.

Who are they suitable for?

Venture Capital Trusts are potentially suitable for investors with large portfolios who want to take advantage of the favourable tax treatment given to Venture Capital Trusts. Investors must be over the age of 18.

What are the benefits?

Investors receive exemption from UK income tax on dividends from Venture Capital Trusts and from UK capital gains tax on gains made from selling Venture Capital Trust shares.  Each year, investors may make investments of up to £200,000 (2009/10 and 2010/11) and receive tax relief of 30% in the year of investment.  Shares must be held for a minimum of five years in order to retain the tax relief.

What are the risks?

As well as the usual risks associated with investment, Venture Capital Trusts carry additional risks for investors:

·          A Venture Capital Trust’s shares, although listed, may be difficult to realise.

·          You should regard an investment in a VCT as a long term investment, particularly as regards a Venture Capital Trust’s investment objectives and policy and the five year period for which shareholders must hold their ordinary shares to retain their initial income tax reliefs.

·          The investments made by Venture Capital Trusts will normally be in companies whose securities are not publicly traded or freely marketable and may therefore be difficult to realise and investments in such companies are substantially riskier than those in larger companies.

·          If a VCT loses its Inland Revenue approval tax reliefs previously obtained may be lost.