Venture Capital Trusts
What is a VCT? A Venture Capital Trust (VCT) is a type of investment company, listed on the London Stock Exchange and managed by professional fund managers, that is designed to fund small, early-stage UK businesses. VCTs invest in UK businesses that are seen as high-growth or are not yet quoted on a major public trading platform.
VCTs carry an elevated level of risk, but they can offer enticing tax benefits, including income tax relief on new investments, tax-free dividends, and Capital Gains Tax (CGT)-free growth when shares are sold. In return for accepting the higher risk associated with investing in these types of companies (where the value can go down), the government encourages VCT investments. The specific tax benefits for eligible investors include:
- 30% Income Tax relief on investments up to £200,000 per tax year (shares must be held for at least five years)
- Tax-free dividends on income received from VCT shares
- Capital Gains Tax-free growth when you come to sell your VCT shares
Note: From April 2027, the tax relief for VCTs will be changing, with the tax relief dropping from 30% to 20%.
Why do we use VCTs?
For higher and additional rate taxpayers, the short- and long-term income tax relief available through Venture Capital Trusts can make them a compelling component of a tax efficient investment strategy.
They can be particularly relevant for business owners who have built up significant cash within their companies and are looking for efficient ways to extract funds. In many well-structured financial plans, directors will limit their personal income to thresholds such as £50,270 or £100,000 to avoid higher tax rates and the loss of allowances. VCTs can provide a valuable mechanism to help offset some of the tax incurred when extracting additional income.
An interesting feature arises in year five of a VCT strategy. Once the minimum holding period has passed and funds can be withdrawn without penalty, many investors choose to reinvest. This can generate a further 30 percent income tax relief, reducing to 20 percent under future rules, which can then be offset against new income, such as dividends. In practice, this can allow directors to increase earnings in a more tax efficient manner.
VCTs are often most suitable for individuals who have already maximised pension and ISA allowances and are seeking additional ways to reduce tax liabilities while diversifying their portfolios. Given the higher risk profile and lower liquidity, we typically recommend only allocating a small and carefully considered proportion of accessible assets.
Most VCTs also aim to provide tax free dividends, often targeting around 5 percent per annum, which can form an attractive supplementary income stream. The diversification benefits can also be appealing, as VCTs provide exposure to UK private equity, an area that is often underrepresented in typical developed market equity portfolios.
However, VCTs are not appropriate for every investor. The higher risk, limited liquidity and minimum holding period mean they should only be considered where they align with an individual’s broader objectives and risk tolerance.
What do we need from the client? Before recommending a VCT, we need a thorough understanding of your tax position, investment experience, capacity for loss, risk profile, and long-term objectives.
Given the complexity and risk involved with VCTs, we may only deem them suitable in specific circumstances and as part of a broader, more comprehensive and considered financial plan.
What will we produce? VCT recommendations, where appropriate, are incorporated within your wider financial and wealth management strategy. We will present a clear rationale for any recommendation, including the specific VCT provider, its investment focus, and how it fits within your overall portfolio.
We may recommend a Generalist VCT, where a range of small, unlisted companies may carry less risk; one listed on the AIM (Alternative Investment Market), or a Specialist VCT, where one is concentrated on a specific business sector.
What tools do we use?
- MICAP – we use MICAP to conduct in-depth research on VCTs and other alternative asset classes. Their analysts perform a rigorous review of hard and soft data across most providers, giving us confidence in the quality of the products we recommend to clients.
Note: Tax reliefs described are subject to change and depend on individual circumstances. VCT shares are higher-risk investments and are not readily realisable. The value of investments can fall as well as rise, and you may not get back the full amount invested. Past performance is not a reliable indicator of future results.