Tax-efficient Venture Capital Trust (VCT)

You might be able to use a Venture Capital Trust (VCT) to reduce your tax liability. VCTs are one wealth management strategy that mitigates tax.

What is a Venture Capital Trust (VCT)?

Investors typically gravitate to bigger and more established companies because they offer less risk. To bolster investment in smaller unlisted companies, in 1995 the UK introduced a scheme to encourage investment in those smaller companies. This scheme is known as the Venture Capital Trust (VCT) scheme where investment companies called VCTs focus on smaller businesses. 

The scheme has created lots of success stories with many of the businesses eventually acquired by global companies, such as Microsoft. 

Investors are rewarded for taking a risk on smaller unlisted companies by receiving UK tax relief. They receive upfront income tax relief of up to 30% on investments of up to £200,000 per tax year into newly issued shares provided the shares are held for at least five years and do not have to pay Capital Gains Tax (CGT) on the profitable sale of the company shares in the future.

Venture Capital Trust (VCT) dividends are tax-free for individual investors, meaning they are not subject to income tax. However, while the dividends themselves are tax-exempt, they may still need to be declared to HMRC if the investor is required to file a Self-Assessment tax return, for example, if they have other taxable income.

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When to use a VCT

Using a VCT is an effective way to diversify an investment portfolio while also accessing tax advantages. However, you should only do so as part of a long-term strategy. You’ll need to hold your shares for at least five years to be eligible for the tax advantages. If you sell them within this timeframe, you will have to pay money back to HMRC.  

How to buy VCT shares

Venture Capital Trust (VCT) shares can typically be purchased in two ways: (1) through a 'new share offer' when the VCT issues new shares, usually on an annual basis, or (2) through a financial advisory firm, which can facilitate the purchase of VCT shares, either in the secondary market or by guiding you through a new share offer.

As VCTs are listed companies themselves, you can purchase shares through a stockbroker on the open market. However, second-hand shares like these do not offer identical tax incentives. 

Whatever your current stage, we are here for you. Whether that’s continuing to grow your wealth, making plans to retire or arrangements to pass your wealth on to the next generation.

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Risks of using a VCT

Using a Venture Capital Trust to mitigate tax liability can be a successful wealth management strategy. Some businesses may grow quicker than others for faster results. However, as with all investments, the investor’s capital remains at risk. VCT investments may be higher risk and using professional VCTs that focus on a single industry can be even more high risk. 

It can also be harder to sell your shares. There is a smaller market for VCT shares compared to listed companies. Moreover, second-hand VCT shares do not offer the buyer the same upfront income tax relief.