Venture Capital Trusts or VCTs offer investors a means of investing in smaller UK companies, while enjoying tax relief of 30% paid up-front by government.
VCT investments must be between £3,000 – £200,000, and the shares must be held for 5 years, in order to retain the tax relief.
If for any reason Venture Capital Trust investments are terminated before the end of the 5-year period, the 30% in tax relief must be paid back to HMRC.
There are now very innovative VCT models available which have very effectively minimised risk. As the top tax bracket has now risen to 50%, VCTs are a more attractive investment than ever, particularly for high earners.
VCTs – the Tax Breaks
The 30% tax relief available on VCTs is based on the investor’s income tax liability in the year of investment. In other words, investors can only claim against the income tax they have paid in the current year.
For example, the 30% tax relief on a VCT investment of £100,000 would be equal to £30,000. However, this would be available only if the individual had paid £30,000 in tax during the current tax year.
The relief can be used against all forms of income tax paid, not just earned income, and all dividends are tax free. Any capital gains on shares sold in the VCT are also tax free.
Market conditions are extremely favourable to VCT investments at present.
With bank lending to smaller companies relatively difficult to obtain at present (January 2011), many dynamic companies are looking around for alternative sources of finance – and see VCTs as an attractive option.
Consequently, VCT managers have never had such a range of high quality projects vying for funding, and the quality and standard of companies where they invest has never been so good.
VCTs are a valuable and highly tax-efficient strategic investment which can be used as part of a balanced financial plan, in conjunction with Individual Savings Accounts (ISAs) and a personal pension.