Venture Capital Trusts

Venture Capital Trusts (VCTs) invest in Unquoted and AIM listed stocks. AIM is the Alterative Investment Market and its constituents are mostly small early stage companies. Venture Capital Trusts are quoted on the London Stock Exchange and are similar to investment trusts. They can be purchased and sold in the usual way. Providing they meet certain Inland Revenue requirements including investing at least 70% of their assets in companies within three years of formation then they have the ability to distribute capital gains free of tax. There are also substantial tax relief's available to investors who subscribe to new VCT issues.

For the first time in many years the UK Government has increased a tax break available for private investors. In April 2004 they increased the maximum allowable contribution to Venture Capital trusts (VCT's) from £100,000 to £200,000. The tax free dividend and capital gains tax allowances have also remained in place. As a result many well known investment houses have begun to enter the market and there are a wide variety of Trusts available for investment.

Each VCT has a limited offer period and to obtain the attractive tax breaks investment must be made during the initial offer period. Shares can be traded on the secondary market but the capital gains tax and income tax breaks do not apply in this instance .

For those who are not familiar with VCTs they are a tax efficient way to invest large sums of money in small companies. A VCT is in simple terms a collective investment which pools contributions and invests in a diverse portfolio of stocks. To obtain the tax breaks the Government makes certain restrictions on the fund manager:

• At least 70% of the assets must be in qualifying companies
• Companies must carry out their trade wholly or mainly in the UK
• Investment can include loans to companies of up to 5 years duration
• Shares must be in unquoted companies or those listed in the Alternative Investment market (AIM)
• Up to £1 million can be invested in each company and cannot make up more than 15% of it's assets
• Total assets must not exceed £15 million
• Once companies become listed on the main market the manager can hold them for a maximum of 5 years

Not only do VCTs offer investors access to a market only usually available to very high net worth individuals providing further portfolio diversification but their tax benefits are significant:

• Investors receive 30% tax relief on all contributions made to a new VCT. This has increased from 20% since April 2004.
• Dividends received are free of income tax
• Capital gains made on realisation are free of Capital Gains Tax.
  

There are of course restrictions on investment:

• You can only invest £200,000 in any one tax year
• Unused allowances cannot be brought forward
• The investment must be held for at least 5 years

VCTs are appropriate for a wide variety of investors:

• Higher rate tax payers
• Those with a substantial portfolio looking to diversify
• Those willing to accept a high risk profile
• Those wanting a tax free income
• Those who have already utilised their ISA allowance

Before recommending any VCT investment we consider a number of different aspects of investment . The fund manager must have experience in the field. Investing in smaller companies is a specialist area and requires experience and knowledge of the market. We would usually only consider managers we are familiar with who are backed by a well known institution.

Charges also play a part but the most important consideration is the investors attitude to risk. VCTs, whilst being strong performers, are also amongst the most volatile and also require an investment period of at least 5 years.

If you are interested in VCT investment, which can be made with a minimum of £3,000 please do not hesitate to contact me.