Venture Capital Trusts - Tax Benefits of VCTs

Venture Capital Trusts attract three main tax benefits, all of which are available on shares up to the maximum investment limited (£200,000 per individual for 2010/11).

• Income tax relief – individuals will receive a credit against their income tax liability in the tax year of subscription equal to 30% of the amount invested. The credit will be limited to reducing the income tax liability for the relevant year to nil. This relief is contingent upon minimum holding period of five years and investors must apply for the shares in their own name and not through a nominee (shares can subsequently be transferred to a nominee once they have been issued). To claim income tax relief, an investor must subscribe cash for new shares.
   
• Tax free dividends – Any dividend paid by the VCT to investors is not subject to income tax. Furthermore, the VCT itself does not pay corporation tax on portfolio gains and is therefore able to distribute the capital gains that it makes on an investment in a very tax-efficient manner.
   
• Capital gains tax exemption – Any capital gain realised by the sale of shares in an approved VCT is not liable to CGT.

The first of the above tax benefits applies only on subscription for new VCT shares, but the other two are still applicable to the purchase of existing or second-hand VCT shares on the secondary market.

VCTs should, by their nature, be considered as high-risk investments.  VCT investments may be difficult to sell and should therefore be regarded as long term investments. The value of a VCT can go down as well as up so you may get back less than you originally invested, even taking into account the tax benefits.  These tax breaks can be withdrawn and you may be required to repay any tax relief which you have received.  Therefore it is important that investors understand the risks associated with them.