Venture Capital Trusts – what are they and how do they benefit investors and business owners?

The UK government introduced Venture Capital Trusts (VCTs) in 1995 as a way of encouraging investment into small, entrepreneurial businesses. Over the last 30 years, VCTs have helped to create jobs, reward innovation, and support growth for the UK economy and businesses.

In this article, we look at what VCTs are and how they help drive growth for businesses owners. We’ll also explore how VCT tax relief works and the main differences between EIS and VCT, two important types of capital-funding schemes.

What is a VCT?

VCTs stands for Venture Capital Trusts. They are type of collective investment vehicle where the money from several investors is pooled together and invested into small, high-growth companies. The VCT itself is traded publicly on the stock market and units can be purchased either when new capital is raised or from current investors (known as the secondary market). However, from an investor’s point of view, the main benefit comes from purchasing a VCT when it is raising new money from investors.

VCTs fall into three categories, depending on the investment objective:

• Generalist VCTs – as the name suggests, this is the plain VCT which invests in small companies across a range of different sectors and industries. This is good option for investors looking to add an extra layer of diversification across their investment portfolios.

• AIM VCTs – this type of VCT has a focus on investing in company shares listed on the Alternative Investment Market (AIM). AIM shares are publicly listed shares so they’re easier to buy and sell than privately owned, unlisted companies.

• Specialist VCTs – are the opposite to generalist VCTs. They focus on investing in a particular sector or industry, such as energy, technology, or infrastructure. Investing in one area of the universe carries greater risk, but also greater potential reward. As with any VCT, they’re high risk so they should only make up a small proportion of your investment portfolio, and form part of a wider tax planning strategy.

VCT tax benefits for investors

1. Income tax relief – investors in VCTs can claim income tax relief at the rate of 30% of up to £200,000 per tax year, provided they hold the VCT for at least five years. To claim the tax relief, the individual must be liable for, or have paid, as much tax as they invested in VCTs. This benefit doesn’t apply to shares bought in the secondary market.
2. Dividends
   VCT dividends aren’t taxable, meaning no income tax is payable on dividends from underlying shares held in the VCTs. Even though investments are in small, high growth companies, it is possible for VCTs to distribute dividends from capital, meaning any profits can be paid to investors as tax free income.
3. Capital gains tax - no capital gains tax (CGT) is payable when investors sell the VCT shares.

What is the difference between VCT and EIS?

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are similar as they sit in the same family umbrella of Venture Capital Schemes (VCSs). The other VCS is the Seed Enterprise Investment Scheme (SEIS).

One of the main differences between the two is the length of time the investment needs to be held for it to qualify for certain tax benefits. An investor is required to hold a VCT for a minimum of five years to qualify for 30% income tax relief, whereas the minimum holding period for an EIS is three years for the same tax benefit.

Another key differential is the maximum investment limits. For VCTs, the maximum you can invest in a single tax year is £200,000, benefiting from tax relief up to £60,000 (or £30%). However, the maximum amount you can invest into EISs is £2 million per tax year, providing the second million is invested in “knowledge intensive” investments.

Lastly, an EIS portfolio offers the investor direct ownership to the shares in one or more early-stage companies, so they’re higher risk when compared to a VCT which is a market-listed, collective investment with a small stake in lots of small companies.

How can small businesses apply for VCT funds?

Historically, the UK has been one of the world’s most successful markets for entrepreneurial small companies. But companies that start small usually need funding to help them grow and propel themselves to the next level.

VCTs are a great option to help business owners and entrepreneurs secure capital investment for their business. Companies that started off with funding from VCTs have grown to become household names, or have been sold to global brands, such as Microsoft, Amazon, and X (formerly Twitter).

Before approaching investors for funding through VCTs, you can ask HMRC if they agree your proposal to raise money is likely to qualify, but you must check the conditions of the scheme first. This is called an ‘advance assurance’ which you can use to show potential investors that an investment might qualify for a scheme.

To receive VCT funding, your company must be permanently based in the UK and carry out what the HMRC calls a ‘qualifying trade’. This is mostly based on the sector your company trades in, its size (less than £15 million gross assets), the investment amount, and the age of the company. But there are also other requirements.

Working with Charles Stanley

At Charles Stanley, we offer professional advice and work alongside multiple partners to help effectively manage your finances. We offer planning across the generations with both personal and business finances fully considered.

Our experts are at hand to provide a financial planning perspective to business owners and their advisers as they decide the best way to fund their business. We work with legal, tax, and accountancy teams to help owners structure and manage owner wealth outside their business and ensures that a wealth plan aligns with a holistic plan for life including philanthropy, new business causes, and personal life and retirement.

Find out more about our financial planning services