What are VCTs and are they suitable for my clients?

The government has recently announced an extension of the Venture Capital Trust (VCT) scheme until 2035, offering an additional 10 years of certainty for financial advisers who utilise these tax-advantaged vehicles for their clients. (Source: FT Adviser)

This sets VCTs on course to mark their 30th anniversary next year, as the scheme was established in 1995.

But what exactly are VCTs? How do they function, who are they designed for, and why should you consider using them?

A VCT is a publicly listed company on the London Stock Exchange that invests in other businesses, making it similar to an investment trust in that regard.

However, there’s a key distinction – as suggested by the name. While an investment trust can invest in virtually anything, VCTs focus on young, growing UK companies that are either unlisted or listed on the Alternative Investment Market (AIM).

These businesses are classic venture capital investments, characterized by being small (with assets capped at £15 million) and in their early stages (typically less than seven years old at the time of investment).

To encourage individuals to invest in VCTs, the government provides attractive tax incentives. The most notable is a 30% upfront income tax relief. For example, if you invest £10,000 in VCTs, you can reduce your tax bill by £3,000 in that same year. You can invest up to £200,000 annually in VCTs and still receive the 30% relief, as long as you have enough income tax liability to offset.

However, there’s a condition: you must hold the VCT shares for at least five years, or the relief will be reclaimed.

Additional tax benefits include tax-free dividends, which is significant since VCTs typically aim for a 5% yield, and capital gains that are exempt from tax. These benefits are not tied to the five-year holding requirement.

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What are VCTs and are they suitable for my clients?

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