Venture Capital Trusts (VCTs)
26th June 2013
The Financial Conduct Authority (FCA) has decided that VCTs should not be classified as unregulated collective investment schemes (UCIS), which is good news because it means that retail investors can continue to use them as part of their investment and tax planning. By encouraging investment into smaller UK businesses, VCTs provide funding to a dynamic sector of the UK economy.
VCTs are listed on the London Stock Exchange, in the same way as investment trusts, and as such they have strong corporate governance measures in place.
The attractions of VCTs are the 30% income tax relief on new shares if the investment is held for at least 5 years, and the dividends which are tax free. They also provide portfolio diversification, because they typically invest in smaller companies of the sort that would not be included in other parts of the portfolio. It may be desirable to include exposure to smaller companies in larger portfolios, and gaining some tax relief in the process is helpful. With increasing restrictions on pension contributions, VCTs offer a very tax-efficient way of saving that complements pensions.
You can buy VCT shares in the secondary market, but the income tax relief is not available. On the other hand, they can often be bought at a substantial discount to net asset value, and the tax free dividends are still available.
This note is for general guidance only and represents our current understanding of law and HM Revenue and Customs practice as of 26 June 2013. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering into any transaction. Past performance is not a guide to future performance. The value of investments and the income therefrom can go down as well as up due to stockmarket and currency movements and you may not get back the full amount you invested. When you sell your investment, you may get back less than you originally invested. The value of overseas securities will be influenced by the rate of exchange which is used to convert these to sterling. Levels and bases of, and reliefs from taxation are those currently applying but are subject to change without notice and their value depends on the individual circumstances of the investor.
Investing in smaller companies is ‘high risk’ and the VCTs may be investing in unquoted smaller companies where there is no market in the shares of those companies. Thus there is both a high risk of loss of value and loss of liquidity in the investments being made. The VCTs are themselves quoted as investment trusts and as such should be saleable in the stockmarket albeit at a price to reflect the above risks.
Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority.