Venture Capital Trusts (VCTs) continue to be a popular choice for business owners and senior executives looking for a tax-efficient investment. A total of £731 million was invested into VCTs in the 2018/19 tax year, the second highest amount since the tax shelters were launched in 1995.
VCTs can be a useful tool for individuals looking to supplement their income in retirement, and who want to take advantage of the tax benefits on offer. Keep reading to find out more.
VCTs deliver ‘vital economic, social and environmental benefits’
Venture Capital Trusts spread investment risk over a number of companies since individuals invest indirectly in a range of small companies. Investors subscribe for shares in VCTs, run by fund managers, which are companies listed on the London Stock Exchange and are similar to investment trusts.
As well as offering benefits to the individual investor, VCTs are also an important source of funding for many small businesses.
AIC Chief Executive, Ian Sayers, says: “VCT-backed businesses deliver vital economic, social and environmental benefits, with jobs more than doubling after VCT investment.”
A quick summary of VCTs
- Maximum investment – £200,000 per tax year
- Tax relief – 30%
- Holding period – 5 years
- Dividends – Exempt
- Capital Gains Tax – Gains exempt
What are the conditions a company must satisfy for it to be a VCT?
- Its income is wholly or mainly from shares or securities
- Its ordinary shares are listed on the London Stock Exchange
- At least 70%, by value, of its investments, comprise holdings in qualifying companies
- The holding in any company must not represent more than 15% (by value) of its investments
- It must not retain more than 15% of the income it derives from shares or securities.
The tax benefits of a VCT
There are three main tax reliefs available to individuals who invest in VCTs. We’ll look at these in turn.
1. ‘Front-end’ income tax relief
This is available at 30% of the cost of new ordinary shares subscribed for up to the ‘permitted maximum’ of £200,000. It is set against your income tax liability for the year of assessment in which the shares are issued.
The maximum tax reduction in your income tax liability in any one year is, therefore, £60,000, providing a sufficient income tax liability exists to cover it.
Dividends received from VCT shares are exempt from income tax (‘dividend relief’) in respect of shares acquired within the ‘permitted maximum’ of £200,000. These dividends do not have to be included in your tax return.
You must hold the shares for at least five years. This tax relief will be withdrawn, in whole or in part, if you dispose of the shares within five years of issue.
Tax relief can be claimed either with your tax return or as a standalone claim.
2. Exemption from Capital Gains Tax on disposals
There will be no chargeable gain (or allowable loss) for CGT purposes on selling ordinary shares in a VCT provided:
- The shares were acquired within the permitted maximum for the tax year in question.
- The VCT was approved as a VCT both when the shares were acquired and when they were sold.
There is no minimum period for which the shares must be held.
3. Exemption from Income Tax on dividends
You do not need to pay Income Tax on any dividends from a VCT (both for newly issued shares and those previously owned).
As for ‘dividend relief’, CGT relief is available for both newly issued shares and second-hand shares.
How a VCT can help pension planning
Many business owners and execs want to contribute to their pension but are limited by issues such as the Annual Allowance and the Lifetime Allowance. If you earn more than £150,000, you’ll also face a potential tax bill thanks to the Tapered Annual Allowance.
This means that VCTs could become a valuable part of retirement planning if your pension limits are at risk of being breached, particularly if you are close to or in retirement.
This is partly because dividends from a VCT paid are completely tax-free. So, a VCT is often used in retirement planning when investors are seeking a regular tax-free yield.
It’s important to remember that VCT investments come with increased risk, which means they should be only part of an investment mix.
Get in touch
If you’re interested in VCTs, or you simply want expert advice regarding your retirement provision, please get in touch. Email firstname.lastname@example.org or call us on 01454 416653.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.