VCTs are designed to attract private investment into emerging UK companies that often struggle to access finance through mainstream funding sources such as banks, whilst also helping to drive job creation, innovation and economic growth.
VCTs also offer investors the opportunity to diversify asset classes and potentially achieve higher returns than other investment options. However, it is important to heed the familiar adage: ‘Don’t let the tax tail wag the investment dog.’ Investment in VCTs carries a higher risk than some other investments and must align with an investor’s wider objectives. Investments into younger, smaller companies are higher risk than in larger, established businesses as they are at an earlier stage in their development, so VCTs offer generous tax reliefs to incentivise investment of up to £200,000 per tax year in new VCT shares.
So, what are the tax benefits available through VCTs?
An investor in new VCT shares can receive up to 30% income tax relief on their investment of up to £200,000 in each tax year, regardless of whether their usual tax rate, as long as they have sufficient income tax liability for that year and provided that the new shares are retained by the investor for at least five years after issue. The relief investor can be claimed through a tax return or, if the investment is earlier in the tax year, the investor may prefer to contact HMRC and request the relief through an adjustment to their tax code.
The dividends paid on VCT shares are received tax-free, which can be an attractive option for investors looking to build supplementary income streams as part of their portfolio or retirement strategy, particularly in view of tax changes that have impacted income in other areas such using the Dividend Allowance for income from other investments. It is important to note that dividends from VCT shares are not guaranteed and depend on investment performance achieved by the VCT manager.
The gains made by an investor on the sale of VCT shares are exempt from capital gains tax (CGT). Following significant reductions in the tax-free allowance for CGT in recent years, as well as increases in the rates of CGT apply to various types of assets in the 2024 Autumn Statement, VCTs can provide an attractive alternative for investors looking to reduce their CGT burden.
Further details about the tax reliefs available on VCT investment can be found at GOV.UK.
VCTs are more than simply a tax planning option. They can provide investors with an attractive, complementary asset in building their portfolios, offering the potential for superior tax-efficient returns through access to highly diversified, expertly researched portfolios of emerging businesses in some of the UK’s most innovative and cutting edge sectors.
Important: Whilst the tax reliefs described here make VCTs an attractive tax planning option, tax treatment depends on individual circumstances and may be subject to change, so investors are always encouraged to seek professional advice before making investment decisions.