Benefits
The attractions for individuals investing in a Venture Capital Trust include not only the opportunity to participate in the growth of the unquoted investment portfolio but also to enjoy valuable tax benefits on an investment of up to £200,000 in each tax year.
These tax benefits include:
- Income tax reliefPrior to 6th April 2006 investors subscribing for new ordinary shares in a VCT received income tax relief of 40% of the amount subscribed in the year of subscription, as long as the shares are held for at least three years.
Since 6th April 2006 the income tax relief has been reduced to 30% and the shares must be held for five years to qualify. - Capital gains tax deferralSince 6 April 2004 this is no longer possible.
- Tax free dividendsInvestors are exempt from CGT on the sale of VCT shares and from income tax on dividends received from a VCT.
Unlike an investment trust, a VCT's net realised gains on the sale of investments may be distributed to shareholders as tax free dividends. Realisation proceeds not distributed in this way are available for reinvestment.
An example of how the tax reliefs work is shown below:
| Pre 5th April 2006 | Post 5th April 2006 | ||
|---|---|---|---|
| Tax reliefs - An illustration | Income tax relief claimed | Income tax relief claimed | Assuming no tax reliefs claimed |
| Initial Investment | £10,000 | £10,000 | £10,000 |
| Tax relief claimed: Income tax (40%) | (£4,000) | (£3,000) | - |
| Effective net cost of investment | £6,000 | £7,000 | £10,000 |
The illustration shows that an investment of £10,000 has an effective net cost of £6,000 (£7,000 for post 05/04/2006), if an investor claims income tax relief compared to an equivalent investment where no income tax relief is available.
| Dividends - Tax free effect | Income tax relief claimed | Assuming no tax reliefs claimed |
|---|---|---|
| Dividends | £300 | £300 |
| Net annual return | 5.0% | 3.0% |
| Gross annual return | 8.7% | 2.0% |
The table above assumes that a dividend of 3.0 pence per share is paid on an investment of 10,000 shares (pre 05/04/2006) costing £10,000 (£1 per share). A higher rate tax paying investor claiming income tax relief should receive an equivalent tax free annual return of 5.0%.
For investments made after 05/04/2006 the equivalent tax free annual return would be 4.3% and 7.1%.
Benefits to the company
The main benefit of a VCT to a company is access to relatively small amounts of equity finance. Each VCT can invest up to £1 million per company in each calendar year and larger amounts can be raised by syndicating the investment between several VCTs or other venture capital institutions. VCT's can also invest in new share capital raised by companies trading on the Alternative Investment Market (AIM). Many relatively small companies have raised substantial amounts of equity financed by listing on AIM. For more information on AIM please visit www.londonstockex.co.uk.
