Four types of venture capital trusts explained

Venture capital trusts (VCTs) are a type of investment trust with attractive tax breaks. They are listed on the London Stock Exchange and generate returns by investing into smaller companies that are looking for capital with which to develop their business.

Four types of VCT

There are four different types of VCTs available.

1. Generalist VCTS
Generalist VCTs cast a wide net to find investment opportunities in companies at various stages of development, in all different sectors. These are arguably the most popular form of VCTs.

2. Specialist VCTs
Specialist VCTs find companies to invest in within one specific sector. These are not as common as they have been in the past.

3. AIM VCTs
AIM VCTs invest into companies which are, or are about to be, listed on the AIM market.

4. Limited life VCTs
At the lower risk end of the VCT spectrum, limited life VCTs aim to invest capital and then wind up within five to seven years. This is a guideline time horizon however, and not a guarantee.

What are the characteristics of a VCT?

A VCT has a number of distinguishing characteristics. It must:

  • Be listed on the London Stock Exchange
  • Derive its income wholly or mainly from shares or securities 
  • Not retain more than 15% of this income
  • Return any income in excess of this amount to shareholders 
  • Not have any single holding that represents more than a 15% share of the overall portfolio value
  • Have invested at least 80% of money raised within three years into either qualifying companies or shares. 30% must be invested within the first 12 months.

Who might consider investing in a VCT?

VCTs are probably best-suited to investors who are able to take a long-term view (at least five years), as they expose investors to greater risk than some other investment products. For this reason, they have also often been viewed as a product perhaps best suited to quite experienced investors.

An investor who has already invested all their annual ISA and pensions allowance may consider them for their tax advantages.

What are the tax benefits of VCTs?

In order to encourage potential investors to take on the extra risk, VCTs offer attractive tax breaks.

Income tax relief

The main benefit, in the eyes of most investors, is that you can receive 30% income tax relief on investments up to £200,000.

However, in order to receive and keep this tax relief there are three conditions:

1. You must purchase new shares in VCTs. You cannot get this tax relief if you buy shares in VCTs on the secondary market (if you buy an existing VCT investment from another investor, rather than a VCT company).

2. You must have already paid the equivalent amount, or more, in income tax that year. For example, in order to claim back £15,000 from a £50,000 VCT investment, you must have paid at least £15,000 in income tax that year. If you have only paid £10,000 in income tax you can only claim back that amount.

3. You must hold shares in the VCT for at least five years to keep the income tax relief; if you sell before this point, you will have to pay it back.

Other tax benefits

Other tax benefits associated with VCTs include:

  • No income tax payable on dividends received from the VCT investment
  • No capital gains tax payable upon the sale of the VCT 
  • Gains within the VCT are free from corporation tax.

What are the risks of VCTs?

It is important to understand that VCTs carry a higher risk than many other forms of investment. The value of an investment in a VCT may go down as well as up and investors may not get back the full amount invested, even after taking into account the tax reliefs.

VCTs usually trade at a discount to their net asset value. Furthermore, because it may be difficult to exit the investment, VCTs should be considered long-term investments. Tax reliefs are subject to change and the value of the tax reliefs will also depend on personal circumstances.

What are the charges?

There is usually an upfront charge of 5.5%, which is reduced if you choose to invest in a VCT on an execution-only basis via Chelsea. Chelsea is often able to offer discounts on VCT charges; check our current VCT offers for details.

The annual running costs of a VCT can be high but are usually capped at 3.6%. Annual costs include directors' fees, fees for taxation advice and registrars, any trail commissions payable to the sponsor and broker, as well as the investment manager's fee.

How do I invest?

If you would like to invest in a VCT that is available through Chelsea, you can download the prospectus and application form via our website. Or you can call us on 020 7384 7300.

When deciding whether a VCT investment is suitable for you, please read carefully the VCT’s prospectus, which will detail all the risk factors. If you unsure, please seek investment advice.

Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.

Find out more about VCTs and current VCT offers.

Important Notice: VCTS
Please be aware that VCTs are long-term investments. VCTs usually invest in small, unquoted companies and therefore carry a greater risk than many other forms of investment. In addition, the level of charges are often greater than unit trusts and OEICs. Past performance is not necessarily a guide to the future. The value of investments, and the income from them, can fall as well as rise, due to market and currency fluctuations and you may not get back the amount originally invested. All our featured products should be regarded as medium to long-term investments. Chelsea Financial Services offers an execution-only service. If you require investment advice you should contact an expert adviser. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.