Venture Capital Trusts
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Venture capital trusts (VCTs) are very attractive from a tax point of view
but they are a higher risk investment.
VCT's are HMRC approved investment companies that are quoted on the London
Stock Exchange, which invest mainly in unquoted trading companies. The VCT
allows private investors to invest indirectly in those smaller companies that
are in need of financial backing, by purchasing shares in the VCT.
As the carrot for investing in these high risk businesses, you receive 30%
tax relief on the investment made as long as you hold the VCT shares for at
least 5 years. As a result every £10,000 you invest will only cost you £7,000
because of the tax relief.
In addition there is no income tax on dividends received from the VCT, and no
capital gains tax when you come to sell the investment.
Although some of the companies the VCT invests in may do very well, others
never make it. However, some VCTs will invest in more established companies.
Making the Investment
You usually need to be making a minimum of investment of around £5,000.
Whilst there is no limit to the amount you can invest, you only receive tax
relief on the first £200,000.
Because the trust is quoted on the stock exchange it is possible to buy and
sell at any time. However, when you do so, you lose the up-front tax relief if
you sell within five years and the purchaser does not get any tax relief on
their purchase. As a result the price you get if you sell may not be very high.
The Investment rules for the VCT
The VCT must comply with a number of conditions to retain its HMRC approved
status. These are the main rules...
- The VCT has to have 70% of its money in qualifying holdings (see below),
within three years of launch.
- The balance can go into gilts or blue chip shares which can help reduce
the overall risk of the VCT.
- 30% of the qualifying holdings must be in ordinary shares, which do not
carry preferential rights to dividends or assets on a winding up, the rest may
be invested as loans.
- The VCT can invest up to £1m in a qualifying company, but this stake
cannot be more than 15% of the trust's assets.
- The VCT must distribute at least 85% of the income it derives from shares
- A VCT can invest in shares quoted on the Alternative Investment Market
(AIM), however, which can also help to lower the risk.
The qualifying holdings must ...
- Be trading companies that do not undertake to any significant extent an
activity excluded by the legislation, which includes land based trades such as
farming, property development, operating hotels and nursing homes;
- Be unquoted with fewer than 50 full time employees;
- Not have raised more than £2 million under EIS, VCT or corporate venturing
schemes in the previous 12 months.
About the Author
Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of
A M P Associates –
A specialist firm of chartered certified accountants and tax advisers based in
London and Surrey. Jonathan advises on a wide range of business and tax issues
and he is recognized for his proactive and innovative approach to taxation.
Jonathan can be contacted on 0845 009 8845 or email:firstname.lastname@example.org
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Article Published/Sorted/Amended on Scopulus 2008-04-23 16:17:12 in Tax Articles