Venture Capital Trusts

Ven­ture Cap­i­tal Trusts (VCTs) are com­ple­men­tary to the Enter­prise Invest­ment Scheme (EIS), in that both are designed to encour­age pri­vate indi­vid­u­als to invest in small­er high-risk unquot­ed trad­ing com­pa­nies affect­ed by the equi­ty gap. While the EIS requires an invest­ment to be made direct­ly into the shares of the com­pa­ny, VCTs oper­ate by indi­rect invest­ment through a medi­at­ed fund. In effect they are very like the invest­ment trusts that are obtain­able on the stock exchange, albeit in a high-risk envi­ron­ment.

What is a VCT?

VCTs them­selves are quot­ed com­pa­nies which are required to hold at least 80% of their invest­ments in shares or secu­ri­ties that they have sub­scribed for in qual­i­fy­ing unquot­ed com­pa­nies. This increased from 70% from 6 April 2019. VCTs have a cer­tain time peri­od in which to meet the per­cent­age test.

Oth­er con­di­tions are:

• they must dis­trib­ute 85% of their income
• they must have a spread of invest­ments with no sin­gle hold­ing account­ing for more than 15% of the val­ue of total.

VCTs are exempt from tax on their cap­i­tal gains and there is no relief for cap­i­tal loss­es.

Reliefs available to investors

Income tax relief of 20% is cur­rent­ly avail­able on sub­scrip­tions for VCT shares up to a lim­it per tax year of £200,000.

To qual­i­fy for income tax relief the shares must be held for a min­i­mum of five years.

Investors are exempt from tax on any div­i­dends received from a VCT.

Cap­i­tal gains aris­ing on dis­pos­al of the shares are also exempt and for this relief, there is no min­i­mum peri­od of own­er­ship. There is no relief for any cap­i­tal loss­es.

Qualifying companies which a VCT can invest in

The def­i­n­i­tion of a qual­i­fy­ing com­pa­ny for VCT pur­pos­es is very sim­i­lar to that apply­ing for EIS. The com­pa­ny:

• must be unquot­ed, although shares on the Autho­rised Invest­ment Mar­ket (AIM) are deemed unquot­ed for this pur­pose. They may become quot­ed lat­er.
• must not deal in land, leased assets or finan­cial, legal or accoun­tan­cy ser­vices. In addi­tion it must not be a trade that has a large cap­i­tal aspect to it, such as prop­er­ty devel­op­ment, farm­ing, hotels or nurs­ing homes.

Over the years, gov­ern­ments make amend­ments to what are regard­ed as qual­i­fy­ing com­pa­nies for a VCT to invest in. The thrust of the changes is to ensure well-tar­get­ed sup­port for invest­ment into small and grow­ing com­pa­nies, with a par­tic­u­lar focus on inno­v­a­tive com­pa­nies.