Venture Capital Trusts (VCT)

VCTs are highly tax efficient collective investment schemes designed to provide private equity capital for small expanding companies and capital gains for investors. VCTs are companies listed on the London Stock Exchange, which invest in other companies which are predominantly not themselves listed on the main exchange but on the Alternative Investment Market (AIM).

Tax reliefs are different for investors in new shares issued by VCTs and investors who purchase second-hand shares, for example on the stock market. For second-hand shares, the reliefs are:

• exemption from income tax on dividends on ordinary shares in VCTs
• exemption from capital gains tax on disposal of shares in VCTs

For new shares, the same reliefs are available, and in addition income tax relief at the rate of 30% is available on the amount subscribed for the shares up to £200,000 in a tax year if they are held for at least 5 years

Compared with the issue price of new shares in VCTs, the price of VCT shares on the stock market (second-hand shares) tends to be lower, reflecting the absence of income tax relief.

The managers of the 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 investing in funds such as smaller company funds or funds of hedge funds, to maximise returns.