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September 24th 2018

Venture Capital Trusts - what are the tax benefits?

A Venture Capital Trust is a tax-advantaged investment scheme designed to raise capital for unlisted (or AIM listed) companies whilst generating income/ gains for investors.

VCT investments attract a number of tax reliefs which can be very valuable in the right circumstances. Regarding Income Tax these include:

  • No income tax on VCT dividends; and
  • Income tax relief on 30% of the amount subscribed in new ordinary shares, available on investments up to £200k per tax year.

One thing to be careful about though: the income tax relief available on subcription to new VCT shares may be clawed back if those shares are not held for at least five years.

Income tax relief should be claimed via Self Assessment within four years of the 31 January immediately following the tax year in which the investment was made.

Regarding Capital Gains Tax, disposal relief exempts from CGT any gains on the disposal of VCT shares, whether those shares were acquired new or second-hand.

The principle downsides with investing in VCT's are i) the costs associated with managing the investments (annual fees average around 2 - 3%); ii) the investment risk; and iii) to keep the 30% income tax relief on newly issued shares, those shares must be held for at least five years.

There are other tax-advantaged investment schemes available including the Enterprise Investment Scheme and Seed Enterprise Investment Scheme; each works slightly differently and offers different levels of tax relief.

With the increasing restrictions on pension savings, tax-advantaged investment schemes such as VCTs and EIS are becoming increasingly popular. Speak to your advisor today to find out more.

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