Venture Capital Trusts (VCTs) enables individuals to invest indirectly in a range of small higher-risk trading companies whose shares are securities and are not listed on a recognised stock exchange. By investing through VCTs the investor is spreading the investment risk over a number of companies.
What is a VCT?
A VCT is a company whose shares are traded on the London Stock Exchange, although since April 2010 it also included any companies admitted to trading on a regulated market. They are run by Fund Managers who facilitate the ability for investors to subscribe for, or buy, shares in them, which in turn invests in trading companies, providing them with funds to help them develop and grow.
They have become a vital area of funding for the economy, have made a substantial contribution to UK economic growth and without which many companies that will become household names may never have been able to develop and grow their businesses.
A typical VCT investor will see his or her funds spread over a number of, typically 25-30 companies, selected by the VCT manager and can be characterised depending by the type of companies in which they invest, the investment focus and or the lifespan of the VCT itself.
In order to encourage investment in this vital area HMRC provides generous tax benefits to investors including Income Tax relief of up to 30%, tax free dividend distributions an exemption from Capital Gains Tax on capital growth (see “tax benefits” for further details).
Who should invest in a VCT?
It is essential to understand that VCTs are not suitable for all investors.
While they are listed on regulated markets they still represent high risk investments and are only suitable for investors who understand the nature of investing in smaller and medium sized companies that are capable of both taking the longer view and have the capacity for accepting a loss.
We believe they are only suitable for individuals with a high tolerance of risk who have either in excess of £250,000 worth of investable assets or income in excess of £100,000 per annum. Furthermore, are willing to sign an appropriate declaration confirming that they understand the risks inherent with such investment mediums.
Tax benefits of a VCT
Income tax relief: 30% income tax relief on VCT investments of up to £200,000 in any tax year. The VCT shares must be held for a minimum of 5 years to retain the tax relief and investors cannot claim tax relief in excess of their income tax liability
Tax Free Dividends: Dividends from VCT investments are tax free for the investor and do not have to be declared on their tax return.
Tax-free growth: growth in value of VCT shares is capital gains tax free
The St. James’s Place Approach to VCTs
St. James’s Place make available to its clients a panel of VCT providers offering a diverse range of products from across the market place. Product providers (Fund Managers) and VCTs are only made available through our panel once they have gone through an exhaustive due diligence process.
Provider due diligence includes:
- Experience and track record of the Fund Management Team,
- The provider’s relationship with HMRC and their regulator,
- An analysis of their administration processes, IT systems, succession and overall governance.
Product due diligence includes:
- A clear investment strategy and clarity around performance expectations,
- Product prospectus that accurately reflects the risks and liquidity issues for the investor,
- Transparency of all fees, including performance fees that work in the interest of the investor,
- An absence of both any conflicts of interest and the selection of investments we deem inappropriate for this investment medium.
There is a risk that these types of investments may not perform as hoped and in some circumstances, may fail completely, so should not be considered unless you are willing to accept a high level of risk. The levels and bases of taxation, and reliefs from taxation, can change at any time.