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How do VCTs work?
A VCT is a company listed on the London Stock Exchange, which invests in other companies which themselves are not listed on a major exchange. Therefore investors are effectively investing into a company, which invests in small companies.
The managers of a VCT have three years in which to choose companies to invest in and during this time often place the money into cash, gilts or bonds. As they become more sophisticated VCTs are now also investing in funds such as smaller company funds or funds of hedge funds, to maximise returns.
Within 3 years of the share issue at least 70% of the VCTs assets must be invested in 'qualifying' holdings. These are defined as holdings of shares or securities, including loans of at least five years duration, in unquoted companies and those whose shares are traded on the Alternative Investment Market (AIM). These companies must carry out a qualifying trade wholly or mainly in the UK. The balance of 30% can be invested into areas such as Government bonds - gilts - or blue chip shares.
VCTs may invest up to £1m in a qualifying company but each individual investment cannot make up more than 15% of VCT assets. The gross assets of the company into which the VCT invests must not exceed £7m, or £8m following the investment, and it must not have more than 50 full-time employees. If an investment is held in a company that subsequently becomes quoted on the London Stock Exchange then it can continue to be treated as a qualifying VCT investment for up to five years.
What are the tax reliefs available for investors?
Tax reliefs are only available to individuals aged 18 years or over and not to trustees, companies or others who invest in VCTs.
You have to hold a VCT investment for a minimum of five years to benefit from the tax reliefs.
For second-hand shares acquired, for example, through the Stock Exchange you can get two reliefs: dividend relief and disposal relief, an exemption from CGT on any gain made upon selling your shares. But income tax relief (and, where the shares were issued before 6 April 2004, deferral relief, see below) cannot be claimed on these shares.
Investments into new VCT shares offer the following reliefs:
Income tax relief at the rate of 30% on the amount subscribed for the shares. This relief is available on investments up to £200,000 in a tax year, but is subject to forfeit if the shares are not held for at least 5 years.
Exemption from income tax on dividends paid by the VCT, as well as from CGT on disposal of the shares.
If you invested in shares issued before 6th April 2004, you may be able to treat gains arising on disposals around the time your VCT shares are issued as postponed to a later year (called deferral relief).
What are the different types of VCTs?
VCTs can usually be separated into three different types: Specialist, General, and AIM. Some trusts invest in a combination of all three areas; however, more recently VCTs have started to become more focused and some invest only in one sector e.g. media or healthcare.
General VCT
General VCTs spread investments between AIM listed companies and unlisted companies. They often have a policy of investing in companies that are already or very nearly profitable.
The objective is to support companies that have strong management and business models, that are in or entering an expansionary phase, and so can promise growth for their investors.
This approach encompasses those situations in which a committed management team seeks to buy up and turn around a neglected business entity - in other words, a Management Buy-Out.
Specialist VCT
These VCTs invest mainly in unquoted technology companies. A portion of the money raised may be placed in some AIM-quoted companies to reduce some of the risk. Specialist VCTs are perceived to be at the riskier end of the spectrum, but an investment decision based on a rigorous risk/reward assessment can offer higher returns.
AIM VCT
AIM VCTs invest in companies that are quoted on the Alternative Investment Market (AIM) index. AIM is an exchange on which smaller companies' shares are traded.
While it is easier to track the performance and liquidity of the underlying investment via its quote on AIM, only the smallest AIM-listed companies are likely to fall within the maximum size of enterprise that VCTs are permitted to subscribe to.
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