A venture capital trust or VCT is a tax efficient UK closed-end collective investment scheme designed to provide venture capital for small expanding companies, and income (in the form of dividend distributions) and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to investment trusts in the UK or business development companies in the United States. VCTs tend to have a minority stake in the businesses they invest in, as opposed to private equity investing, where a majority stakeholder position is held.
VCTs are companies listed on the London Stock Exchange, which invest in other companies which are not themselves listed. First introduced by the Conservative government in the Finance Act 1995 to encourage investment into new UK businesses, they have proved to be much less risky than originally anticipated.
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
For new shares, the same reliefs are available, and in addition
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 or cash equivalents, gilts or bonds, or in some cases unit trusts / OEICs to attempt to maximise investor return.
Within three years of the share issue at least 80% of the VCT's 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 have a permanent establishment in the UK and carry out a “qualifying trade”. The balance of up to 20% can be invested into areas such as government securities, gilts or blue-chip shares.
VCTs may invest up to £5 million 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 £15 million, and the company must have no more than 250 employees. If an investment is held in a company that becomes quoted on the London Stock Exchange then it can continue to be treated as a qualifying VCT investment for up to five years.
VCTs can usually be classified according to the following criteria:
In the 2018/18 tax year, £731 million was raised by Venture Capital Trusts. This was £3 million more than the comparable figure for the previous year, in which speculation over whether the tax treatment of VCTs would be changed in the Budget caused a surge of investment in autumn 2017.
The amounts raised since income tax relief was set at 30 per cent are as follows:
|Tax year||Amount raised |