Could your clients save tax by investing in a Venture Capital Trust (VCT)?

Venture Capital Trusts (VCTs) have seen a remarkable rise in popularity over the nearly 30 years since their inception. Their tax-efficiency and the sector’s continuing growth has seen them become an increasingly desirable investment option.

FTAdviser recently published figures that show an increase in VCT investments of 63% in the 2021/22 tax year compared to the previous tax year. This amounts to £1.13 billion being invested in VCTs over the period.

But are they the right investment opportunity for your clients?

Read on to find out exactly what VCTs are, the tax benefits they offer, and the risks associated with them.

VCTs are high-risk funds comprised of small start-up companies that are looking to grow

VCTs are quoted private equity funds whose shares trade on the London Stock Exchange. They are typically packages consisting of between 20 and 70 small, usually fledgling, companies that are seeking further investment to help them achieve their growth and development goals.

Clients invest in a VCT by buying shares in it and these shares then rise and fall in value, depending on the performance of the businesses within the trust. As newly formed businesses; make up the trust’s structure, VCTs can be especially volatile and have an increased probability of failing in the first few years.

As a result, they are very high-risk investments and should be approached with caution.

The window to invest in VCTs also requires investors to be extra attentive and make time-sensitive decisions.

Once a VCT reaches its investment goal it will stop taking funds. For particularly desirable VCTs this can occur in a very short space of time, such as with the Amati AIM VCT, which FTAdviser reports raised £25 million in just five days during February 2022.

There have been many success stories born out of VCT backing including businesses such as Zoopla, Five Guys, and Everyman Cinemas.

All the above means that it is important for your clients to consider the pros and cons of VCTs before investing. As they won’t be the right choice for everyone, they should seek the advice of a financial planner to see if VCTs are the right kind of investment for their financial circumstances.

VCTs have a range of tax benefits that make them attractive investments despite the associated risks

Investors don’t typically take on additional risks without the lure of a highly beneficial reward.

The government sees VCTs and the growth of new businesses as vital to the economy. So, they provide attractive tax incentives for investors to encourage them to use their funds to stimulate their development.

These tax benefits include:

  • No Capital Gains Tax (CGT) on any profits derived from VCT investments.When your clients come to selling their VCT shares they won’t face a CGT bill on any profits.
  • Clients can invest up to £200,000 each tax year, while receiving up to 30% Income Tax relief on that investment. So, if they make use of the maximum available VCT tax relief, they could reduce their Income Tax bill by up to £60,000.
  • Any dividends from VCT shares are paid tax-free. This offers investors an alternative source of income from VCTs, rather than trying to sell their shares to turn a profit. This has become even more beneficial this year with the recent hike in Dividend Tax, which came into effect on 6 April 2022.

These tax-efficient benefits could make VCT investments a valuable addition to clients seeking a comprehensive and diversified investment portfolio.

It should be noted though that:

  • Your clients must hold the shares for five years to keep the tax rebate. Any reductions in Income Tax must be repaid if your client sells their VCT shares before the five-year window has elapsed.
  • The tax benefits are only available when investing in a new VCT and not on VCTs sold on the secondary market. However, these second-hand VCTs still count towards the £200,000 allowance for the tax year even though they don’t qualify for the associated tax breaks.
  • If the VCT fails to meet certain qualifying criteria, then its tax-free status can be removed. So, it’s important to ensure that your clients are working with a reputable VCT provider that complies with all rules and regulations.
  • Tax rules are subject to change, so VCTs might not always be as beneficial as they are currently.

As with any tax-efficient investment in the UK, your clients should keep themselves up to date with any ongoing changes and seek the right financial advice before making any investment choices.

VCTs come with their fair share of risks

VCTs are unlikely to be suitable for every potential investor. They require a certain level of funds and pose considerable risks with the potential for losing the total value of an investment being considerably higher than investing in other shares.

VCTs are notoriously more volatile than traditional investments, as the small companies that they are comprised of typically see their respective values swing up and down far more than larger companies.

Many of these fledgling companies will ultimately fail and as a result your client’s investment in the VCT is exposed to a large degree of risk.

It is also worth noting that compared to other types of funds, VCTs tend to have higher associated charges and fees.

VCT investors need to accept the risk of potential losses and be prepared to take a very long-term view on their investment. Your clients should only consider investing in VCTs if it suits their financial circumstances.

Get in touch

Venture Capital Trusts are a high-risk investment. It is very important that your clients remember to seek expert advice before deciding whether investing in VCTs is the right move for them.

If they would like to find out more, email or call us on 0345 505 3500.

Please note

Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who can tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.

Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.

Tax levels and reliefs could change, and the availability of tax reliefs will depend on individual circumstances.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.