What a VCT is
A Venture Capital Trust is a public company that pools money from many investors and uses it to invest in small, early-stage UK businesses. Shares in a VCT trade on the London Stock Exchange like shares in any other listed company, so investors can buy in through a stockbroker rather than needing a direct relationship with a fund manager.
VCTs were introduced in 1995 to encourage investment into smaller UK companies that might otherwise struggle to raise capital, by offering investors a set of tax reliefs in exchange for putting money into qualifying investments and leaving it there for a minimum period.
To keep its VCT status, a trust has to meet ongoing HMRC conditions on where it invests, generally in unquoted or AIM-listed trading companies below certain size limits, similar in spirit to the rules that govern which companies qualify for SEIS and EIS.
What investors get
- Income Tax relief. 20% of the amount invested, up to £200,000 in a tax year, can be claimed back against Income Tax, provided the shares are held for at least 5 years.
- Tax-free dividends. No Income Tax is due on dividends paid by a VCT, on both new and previously held shares.
- No Capital Gains Tax. Gains made on disposal of VCT shares are exempt from Capital Gains Tax, provided the trust remained an approved VCT throughout and the £200,000 annual acquisition limit isn't exceeded.
How a VCT differs from EIS and SEIS
- A VCT pools money across many companies inside one listed vehicle. EIS and SEIS relief is claimed against direct investment in a single company's shares.
- VCT Income Tax relief is 20%. SEIS relief is 50%, and EIS relief is 30%, reflecting the difference between backing one early-stage company directly and spreading money across a diversified trust.
- VCT dividends are tax-free with no cap on the amount. EIS and SEIS don't offer an equivalent dividend exemption, since investors hold shares directly in the underlying company rather than in a trust that distributes income.
- Buying into a VCT means buying shares on the stock market. Buying into an EIS or SEIS round means investing directly in a private company through its own fundraise.
How a VCT differs from a VC fund
- A VCT is a public company anyone can buy shares in through a stockbroker. A VC fund is typically a private limited partnership open only to its own limited partners.
- A VCT carries the Income Tax, dividend and Capital Gains Tax reliefs described above. A VC fund carries no equivalent reliefs for its investors.
- A VCT publishes a share price daily, since it's listed. A VC fund's value is reported periodically by the manager and isn't traded on an open market.
