Much like the tax breaks available for EIS and SEIS the tax benefits of VCT investments can prove attractive to investors. They also serve as an alternative method of raising capital for a start-up company looking to achieve rapid growth.
What is a VCT?
A Venture Capital Trust (VCT) is a publicly listed company investing in small, high-potential UK companies. These businesses often can’t access traditional funding. Therefore VCTs provide essential start- up capital and in return, investors receive generous tax incentives.
Companies qualifying for VCT investment
The company must have a permanent establishment in the UK and carry on a qualifying trade.
Furthermore it must plan to spend the investment on a qualifying trade and not be controlled by another company.
Additionally A company can raise funds via VCT investment provided it meets the following conditions:
The company must also be engaged in a qualifying trading activity, including any research and development which will lead to a qualifying trade.
What's more, the activities of the company, or group (if a member of a group) must not consist to a substantial extent (more than 20%) of non-qualifying activities.
HMRC lists in detail those activities they consider to be non-qualifying activities (for example accountancy and legal services!). Broadly speaking they are similar to those which applied to EIS and SEIS investments.
Income Tax relief for Individuals
In order to secure income tax relief ion a VCT investment, the shares must be retained for at least five years. Additionally they must be a purchase of a new share subscription. This is because no income tax relief is available on the purchase of second hand VCT shares.
Whilst non-UK tax residents cannot access the tax benefits of VCT investments if someone becomes non-UK tax resident after making an investment does not trigger withdrawal of the income tax relief - see below.
Income Tax relief is given at 30% 'upfront' as a tax reducer against an individual's income tax liability and the maximum investment that can be made is £200,000 per tax year.
Example
Danny Blue has an income tax liability of £40,000 for the 2024/25 tax year. He also makes an investment of £100,000 in Hustle and Mark VCT shares in the same tax year.
Danny's net 2024/25 tax liability is £10,000 (£40,000 less £30,000 tax relief on the VCT investment. However if Danny's tax liability was £20,000 then he would not receive a tax refund of £10,000 it would simply be reduced to NIL.
Additional tax benefits of VCT investments
The tax advantages of VCT investments go far beyond just income tax relief. Additionally, as well as the income tax relief available on the initial investment, any dividend income received from the VCT shares are tax free.
Furthermore any profit that you realise on disposal of your VCT shares is exempt from Capital Gains Tax (CGT).
However VCT holdings are not subject to Inheritance Tax (IHT) Business Property relief (unlike say shares invested in an AIM company or private company).
Some planning tips
The tax advantages of VCT investments are especially attractive if you're a high earner. If you fully utilised your annual pension allowance or you're subject to the taper, VCTs offer you a powerful alternative.
What's more if your company has retained profits, they can be a useful method of drawing dividends at a low effective tax rate. Furthermore, because of the tax-free dividends and a CGT free sale after 5 years, you could obtain a greater return on your capital than had you just left it in your company.
Summary
Whilst VCTs carry risk, the tax benefits are unmatched. They reward patient investors who want more than just financial returns—they want impact and efficiency.
For more useful information, check out our Ebooks here
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.