Tax-efficient investing – venture capital trusts
What is a VCT investment?
The UK has a thriving landscape of early-stage businesses, holding promising growth potential. Recognising that investing in smaller businesses can come at higher risk than investing in more established companies, VCTs – or venture capital trusts – were introduced by the government in 1995 to help stimulate support.
Investors are rewarded with various incentives through VCTs:
- Upfront tax relief
- Tax-free dividends
- Tax-free growth
- Diversified access to potentially high growth businesses
There are two types of VCT
Generalist: These VCTs typically have a broad investment approach, seeking opportunities across various sectors, aiming to create a diversified portfolio of investments.
Specialist: As the name suggests, these are investments that focus on specific sectors, industries or types of business, such as technology, healthcare or renewable energy.
Why are VCTs considered tax-efficient investments?
Income tax relief
VCTs provide a 30% income tax relief on your investment, provided you hold the investment for five years. The amount of relief you can claim is restricted to the level of your annual income tax liability. The maximum relief available in any single tax year is £60,000 from a maximum subscription of £200,000 per tax year.
Tax-free growth
When the time comes to sell your investments, any capital growth is not subject to capital gains tax.
Tax-free income
Dividends paid by your VCT are free from tax, helping provide a valuable tax-efficient income.
What are the risks of investing in VCTs?
VCT investments, while offering potential rewards, come with inherent risks. These vehicles typically focus on small and early-stage companies, which can be volatile and may have a higher risk of failure compared to more established businesses.
Liquidity is another risk factor – you might have difficulty selling these investments at a reasonable price and sometimes it might be difficult to sell them at any price.
It is vital that VCT investments are considered in the wider context of your overall financial planning, to ensure they are suitable for your risk tolerance and long-term objectives.
Why should I invest in VCTs?
Despite the risks highlighted, VCTs remain attractive due to their high growth potential and the generous tax relief options.
Many investors find their options limited when it comes to tax-efficient investments. With static ISA allowances and possibly limited pension options, VCTs can offer an attractive alternative for tax-efficient investing.
Incorporating VCTs into your overall investment portfolio can enhance diversification, offering a different risk-return profile compared to more traditional investments. By diversifying across asset classes, you may reduce overall portfolio risk and potentially enhance returns.
It is crucial for individuals considering VCT investments to carefully assess their risk tolerance, conduct thorough due diligence on the specific VCT and be aware of the potential for both financial gains and losses. To discuss this please contact us below.