A guide to venture capital trusts

A venture capital trust is a UK-listed company (a UK firm that is listed on the London Stock Exchange) that invests in smaller firms that are not quoted on a recognised stock exchange. Venture capital trusts are run by fund managers that set out the investment strategy of the VCT and decide on the investments it will make. VCTs are registered with HMRC because investments in a VCT offer income tax relief if the investment remains in place for at least five years. They are higher-risk investments as all firms must be unlisted and can often comprise start-ups and those with expected high rates of growth on their way to being listed in the future. Like most investments based on shares in a company, the potential value of your investment could go down as well as up. You may find you get back less than originally invested and your entire investment is at risk.

VCTs are most suitable for UK resident taxpayers that accept their investment may need to be held for the longer-term (five years plus) and can accept the risk of potentially losing all or some of their money.

A venture capital trust is just one of a range of different venture capital schemes listed with HMRC. These schemes were introduced by the UK Government to encourage investment into new and growing businesses.

• Enterprise Investment Scheme (EIS) – these were launched in 1993/94 and encourage direct investment by individuals.
• Seed Enterprise Investment Scheme (SEIS) – these were launched in 2012 and are for direct investment into certain small companies during their early stages.
• Venture capital trust (VCT) – started in 1995 and encourages indirect investment into unlisted, small firms by individuals through a VCT – like an investment trust.
• Social Investment Tax Relief (SITR) – like an EIS but for investment into social enterprises.
• Share loss relief – formerly called VC Loss Relief, is available on the sale of shares in certain companies.

VCTs allow multiple investors to pool their funds together to buy shares in the VCT, which then makes investments into smaller unlisted companies. This allows investors to spread their risk across multiple firms and VCTs. Investors can purchase shares in VCTs that have been newly created or buy existing shares in an existing VCT from a seller. Income tax relief is only available on shares from new VCTs and you will need to own these for five years for the income tax relief to remain valid. The tax credit is set against your income tax liability in each tax year.

You can check the current rates, limits and rules on tax and HMRC here.

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Investing in a newly formed VCT offers income tax relief on up to 30% of the investment (maximum value £200,000) each tax year. Your investment must remain in place for at least five years or HMRC will claim this tax relief back from you (exemptions apply if you die or sell these to your spouse). Your income tax relief cannot be greater than your income tax liability in any single tax year.

Dividends from investments in VCTs (up to £200,000 per tax year) are tax-free and there is no capital gains tax on investments in VCTs.

There are no special reliefs available for inheritance tax when investing in venture capital trusts.

VCTs have no guarantees about their rate of returns and the value of your shares in the VCT will go up and down. This share value is based on the performance of the investments the VCT has made. If your VCT fund manager goes bust and they are covered by the Financial Services Compensation Scheme (FSCS), then you may be able to claim compensation up to £85,000 .

VCTs usually charge a one-off fee followed by annual costs or ongoing management fees and a performance incentive or bonus. Investors need to check if the fees on a VCT are capped or not.