Venture Capital Trusts (VCTs) are investment companies which typically invest in unquoted trading companies, and are listed on regulated markets such as the London Stock Exchange.
VCTs were launched in 1995 as vehicles to encourage UK taxpayers to invest in smaller, higher-risk UK unlisted companies which needed start-up, early stage or growth capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis. The fund manager invests in companies to seek to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value.
VCTs make an important contribution to the UK economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £10 million and so are beyond the means of most individual investors.
Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made on an investment made by the VCT). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT.
VCT investments aim to offer:
In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in the VCT losing its status and a withdrawal of the tax reliefs for all investors within their 5-year restricted period (as well as a removal of the tax-free dividend status going forward).
Investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest. However, as with any investment, capital is at risk and investors should remember that VCTs are buying shares in and lending money to smaller, often privately-owned and younger companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies.
Source (MI Capital Research Limited (MICAP)
Risk Warnings:
VCTs were launched in 1995 as vehicles to encourage UK taxpayers to invest in smaller, higher-risk UK unlisted companies which needed start-up, early stage or growth capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis. The fund manager invests in companies to seek to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value.
VCTs make an important contribution to the UK economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £10 million and so are beyond the means of most individual investors.
Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made on an investment made by the VCT). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT.
VCT investments aim to offer:
- tax free capital growth
- tax free dividends
- income tax relief at up to 30%
In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in the VCT losing its status and a withdrawal of the tax reliefs for all investors within their 5-year restricted period (as well as a removal of the tax-free dividend status going forward).
Investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest. However, as with any investment, capital is at risk and investors should remember that VCTs are buying shares in and lending money to smaller, often privately-owned and younger companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies.
Source (MI Capital Research Limited (MICAP)
Risk Warnings:
- The value of an investment and the income from it could go down as well as up.
- All investing is subject to risk, including the possible loss of the money you invest.
- Past performance is not a reliable indicator of future results.
- Diversification does not ensure a profit or protect against a loss.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 31st October 2023. You are recommended to seek competent professional advice before taking any action.
