The Venture Capital Trust, or VCT, was born in 1995 under a government scheme designed to encourage investment from private individuals in new and growing companies, which may not offer rock-solid prospects for long-term returns.
Instead of investing directly into a business, experienced investors are encouraged to plough money into a VCT, which in turn selects companies to invest in. A typical VCT fund is usually between £20m and £50m in value, and only targets seasoned investors.
Each VCT is listed on the London Stock Exchange, and is typically run by fund managers who are part of larger investment groups.
What are the benefits of investing?
There are a number of financial reliefs on offer for VCT investors . Each investor receives a 30% tax break on any money put into a VCT, and you may not have to pay capital gains tax on any gains made in disposing of your VCT shares. Furthermore, all dividends are tax-free.
Then, there is the risk element. Because VCTs typically spread each fund across 20 to 30 companies, an investor’s net exposure to each individual company is relatively low.
Terms and conditions
Most trusts demand a minimum investment of between £5,000 and £10,000 per individual, and the maximum investment is usually fixed at £200,000.
To ensure continuity, the investor must stay with their fund for at least five years; if they fail to do so, they are liable to lose their income tax rebate.
Once a VCT has received money, it has to invest all of it into new and growing companies within a three-year period. If it fails to do so, the individuals who have invested money may have to repay their tax break, even though it isn’t their fault – this is one of the more glaring risks of VCTs.
What sort of companies can a VCT invest in?
There are also strict rules governing the size of companies which can receive investment; a VCT cannot invest in businesses with more than 50 employees, or total gross assets of more than £7m.
Independence is another crucial issue. The company must not be controlled by another business, or any person connected with that business. And there are several industry sectors which are barred from VCT investment, including:
- Property development
- Legal or accountancy services
- Leasing or letting assets
- Farming, market gardening, and forestry
- Hotels, hostels or guesthouses
- Shipbuilding, coal and steel
How do I invest in a VCT?
To invest in a VCT you should browse the internet, find a trust or company you like the look of, and download their prospectus. In most cases, the prospectus will be linked to an application form, and you will be invited to send off the completed form, along with a cheque for your investment.
A number of companies, such as Hargreaves Lansdown, offer specialist advice on how to invest in a VCT. You can also check out the HMRC website – although this can get complicated.