Tax reliefs for VCT investors

One of the main reasons investors are drawn to Venture Capital Trusts (VCTs) is the generous tax reliefs they offer. These incentives, designed to encourage investment in early-stage UK companies, can significantly enhance the overall returns on VCT investments. From upfront income tax relief to tax-free dividends, VCTs provide unique benefits making them a compelling option for tax-efficient investing. Below, we explore the key tax reliefs and how they work.

Income tax relief

Income tax relief of 30% on the value of new ordinary shares subscribed. This relief is available on investments up to £200,000 in a tax year.

All shares must be held for at least five years or the income tax relief received must be paid back. The shares must be new ordinary shares and must not carry any preferential rights or rights of redemption at any point in time within five years of the shares being issued.

Tax-free dividends

When VCTs exit a holding (i.e. they sell their position in a particular company) some or all of the capital returned from the exit may be returned to investors in the form of a dividend. The dividends paid out by a VCT are exempt from income tax making VCTs an interesting option for those looking to add tax-free income to supplement their salary for for when they retire.

Capital gains tax relief

You may not have to pay capital gains tax on any gain you make when you dispose of your venture capital trust shares (this is called disposal relief). You can get two reliefs, dividend relief and capital gains tax exemption for example, through the Stock Exchange. However, income tax relief can only be claimed if you subscribe for newly issued shares.

You can get income tax relief for a tax year if shares in venture capital trusts for which you subscribed up to a maximum of £200,000 are issued to you in the year. A tax year begins on 6 April in one year and ends on the following 5 April. You can claim the reliefs, where applicable, from the Tax Office which deals with your tax affairs.

Are VCTs subject to inheritance tax?

When you invest in a VCT, you acquire shares in the VCT itself, not the underlying companies. While the generalist or AIM VCT may invest in qualifying companies, any inheritance tax relief which may have been offered to direct investors in those companies is not passed through to the VCT shareholder.

Only when you hold shares directly in a company that qualifies for BR could your investment receive inheritance tax relief.

How much can I invest in a VCT?

The maximum amount you can invest is £200,000 per tax year. In theory, you could invest more, but you wouldn’t qualify for any of the tax benefits on the excess. The minimum investment will vary depending on the VCT; typically around £5,000.

What companies qualify for VCT investment

The companies that qualify for VCT investment are very similar to those that qualify for the Enterprise Investment Scheme (EIS)

1. Have fewer than 250 full-time employees (or 500 for knowledge-intensive companies).
2. Have gross assets of £15 million or less at the time of the investment, or £16 million immediately afterwards.
3. Be less than seven years old from the date of their first commercial sale. However, there are exceptions for ‘follow-on’ investments and where an established company is looking to raise a significant amount of capital to enter a new product or geographic market.
4. Carry out a qualifying trade.

What are the different types of VCT?

There are three key types of venture capital trust, each with a unique take on what it can and cannot invest in.

Generalist VCTs:

Generalist VCTs invest across a broad range of small, often unlisted companies in sectors such as retail, healthcare, and technology. By diversifying investments, they aim to spread risk, so if one sector underperforms, others may offset it. This diversified approach makes Generalist VCTs the most widely available and commonly chosen type of VCT.

AIM VCTs:

AIM VCTs focus on acquiring new shares from companies listed on the Alternative Investment Market (AIM), a market created by the London Stock Exchange in 1995 for companies that may not meet the stricter requirements of the main market. While many AIM-listed companies are smaller or in earlier stages, they aren’t all startups. AIM VCTs aim to provide a blend of tax-free growth and income by investing in these dynamic, publicly traded businesses.

Specialist VCTs:

Specialist VCTs concentrate investments within a single sector, such as media, healthcare, or renewable energy. With a targeted sector focus, Specialist VCTs can offer higher growth potential within that specific area but may carry higher risk due to limited diversification.

How have VCTs performed?

Below is a summary table showcasing the average performance of Generalist, AIM, and Specialist Venture Capital Trusts (VCTs) over the past 5 and 10 years, based on available data from a few sources.

You will note that the 10-Year Average Total Return (%) for Specialist VCTs is marked as NA for not available. We did not find sufficient information from our sources to calculate an accurate figure for this average.

Total return percentages include both capital appreciation and dividends reinvested. Past performance is not indicative of future results.

What are the risks of a VCT

High-risk investments: VCTs invest in small, early-stage, and often unquoted companies with high growth potential and a high risk of failure. These businesses may lack stability or a proven track record, which increases the possibility of significant losses or limited returns on investment.

Illiquidity: VCT shares can be challenging to sell on the open market due to limited demand, making them relatively illiquid compared to more conventional investments. Further, shares purchased on the market do not offer the tax relief that newly issued shares do so they typically trade at a heavy discount.

Holding period: Additionally, investors need to hold VCT shares for a minimum of five years to retain income tax relief. Selling shares earlier may lead to a loss of tax relief.

Dividend and capital volatility: The returns on VCTs are not guaranteed, and dividend payments can be highly variable. Because VCTs invest in early-stage companies, dividends may fluctuate based on the performance of portfolio companies, and investors may experience years with lower-than-expected returns or none at all.

High fees: VCTs generally have higher fees than traditional investment funds, reflecting the cost of managing high-risk investments in early-stage companies. Management fees, performance fees, and other charges can impact overall returns, so it’s essential to understand the fee structure of any VCT before investing.

Tax relief rules and changes: While VCTs offer attractive tax benefits, these are subject to change by the government. Investors rely on current tax rules to optimise their returns, but changes in legislation could reduce the tax advantages or eligibility criteria associated with VCT investments.

How can I invest in a VCT?

Some VCTs offer the option to invest online while others require completing paper forms.

If you have a financial advisor please speak to them about completing an investment.

If you'd like to see which Venture Capital Trusts may be open to investment, and how to contact them, follow the link below.

VCT investment opportunities

Venture capital trust alternatives

There are alternatives to VCT that similarly offer exposure to growth companies alongside tax reliefs. Below you will find some of the options which may be of interest.

EIS (Enterprise Investment Scheme) funds: Like VCTs, EIS funds offer investors the ability to support early-stage companies in exchange for tax relief. While EIS investments carry additional tax reliefs to VCT (capital gains deferral, IHT relief, applying loss relief against income), they are often viewed as having a higher level of risk. Compare EIS and VCT here.

Seed Enterprise Investment Scheme (SEIS): SEIS appeals to those who are comfortable with the higher risk of investing in very early-stage companies. In exchange for the risk, SEIS offers higher tax relief than both VCT and EIS taking the 30% income tax relief of those and upping it to 50%. Investors may benefit from SEIS reinvestment relief which can reduce a capital gain tax bill if that gain is invested into the SEIS.

Private Equity Funds: Private equity funds allow investors to pool their capital to invest in private companies, often with substantial growth potential. While these funds don’t offer the same tax reliefs as VCTs, they provide exposure to high-growth businesses. Private equity funds usually have longer lock-in periods and may appeal to experienced investors with higher capital reserves.

Direct Investments in AIM-listed Companies: For investors interested in AIM VCTs, directly investing in AIM-listed companies is another option. While this approach lacks the tax reliefs associated with VCTs, it provides access to the growth potential of small, public companies with more flexibility on investment size and timing. However, investing directly in AIM companies requires careful research and carries substantial risk.

Tax benefits through Access EIS

SyndicateRoom's fund, Access EIS, tracks the performance data of over 1,000 active startup investors. It then selects and co-invests with some of the best-performing “super angels” to replicate their collective success and diversify your investment across at least 50 super-angel-backed startups to minimise risk and capture as many potential “blockbusters” as possible. The angels we co-invest with significantly outperform the market.

We make the process of claiming relief on multiple investments as simple as possible for our investors.

Invest in Access EIS