Personal
Tax
Venture
Capital Trusts
Venture
Capital Trusts (VCTs) are complementary to the Enterprise
Investment Scheme (EIS), in that both are designed to encourage
private individuals to invest in smaller high-risk unquoted
trading companies affected by the equity gap. While the more
famous EIS requires an investment to be made directly into
the shares of the company, VCTs operate by indirect investment
through a mediated fund. In effect they are very like the
investment trusts that are obtainable on the stock exchange,
albeit in a high-risk environment.
What
is a VCT?
VCTs
themselves are quoted companies holding at least 70% of their
investments in shares or securities that they have subscribed
for in qualifying unquoted companies. They must distribute
the majority of their income and are allowed to retain only
15%. In addition they must show a spread of investments with
no single holding accounting for more than 15% of the value
of total.
VCTs are exempt from tax on their capital gains and there
is no relief for capital losses.
Reliefs
Available to Investors
Income
tax relief at 40% (20% until 5 April 2004) is available on
subscriptions for VCT shares up to a limit per tax year of
£200,000 (£100,000 until 5 April 2004).
Investors are exempt from tax on any dividends received from
a VCT although the credits are not repayable.
Capital gains arising on disposal of the shares are also exempt
and unlike the EIS there is no necessary minimum period of
ownership. There is no relief for any capital losses.
Removal
of Capital Gains Deferral Relief
Until
5 April 2004 capital gains realised on the disposal of any
asset could be deferred against an investment in a VCT.
However, the government looked at this relief and noted:
- by
definition the investment in VCTs is very sensitive to the
level of capital gains being realised across the economy
and this makes VCT fundraising cyclical
- the
benefits of capital gains deferral have been weakened by
the significant improvements to the business asset taper
relief regime.
Consequently
the ability to defer capital gains against a VCT investment
was withdrawn from 6 April 2004. The quid pro quo for this
at least in part was the doubling of income tax relief from
20% to 40% although this is expected to last only until 5
April 2006.
Qualifying
Companies
The
definition of a qualifying company for VCT purposes is very
similar to that applying for EIS. The company:
- must
be unquoted, although shares on the Authorised Investment
Market (AIM) are deemed unquoted for this purpose. They
may become quoted later.
- must
not deal in land, leased assets or financial, legal or accountancy
services. In addition it must not be a trade that has a
large capital aspect to it, such as property development,
farming, hotels or nursing homes.
How
We Can Help
It
is not possible to cover all the detailed rules in a factsheet
of this nature. If you are interested in investing in a VCT
please contact us for further information.
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For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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