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Venture Capital Trusts (VCTs)

Launched in 1995, Venture Capital Trusts (VCTs) offer investors the opportunity to invest in smaller start up companies. These investments are high risk, and the Government encourages investment into VCTs by offering investors a series of tax benefits.

Investors can receive up front income tax relief of 30% (on up to £200,000 invested per tax year if the shares are retained for five years).

Another benefit is that investors can receive tax free dividends, as well as tax free capital gains if the shares are sold. The tax benefits provided by VCTs offer you an upfront Government-subsidised return, along with additional tax benefits over time.

The companies invested in by VCTs are strictly monitored. 70% of the fund must be invested in qualifying smaller companies. The remaining 30% is generally invested in cash deposits, gilts and other lower risk investments but some fund managers do invest this portion in higher risk investments, increasing the overall risk of the fund.

There are 3 main categories of VCT:

  • AIM VCTs
  • Specialist VCTs
  • General VCTs

AIM VCTs invest in smaller companies that are listed on the Alternative Investment Market. Specialist VCTs tend to invest mainly in unquoted technology companies. General VCTs spread their investments across a portion of AIM listed companies and unquoted technology companies.

Enterprise Investment Schemes

Enterprise Investment Schemes (EIS) are one of the most tax-efficient investment products available to UK investors. They involve in an investment in an unquoted privately held company. EISs are extremely high risk, and are also highly illiquid, which means it may be difficult to withdraw your investment.

EISs can fall into 4 different categories:

  • Single EIS
  • Protected EIS Fund
  • EIS Portfolio
  • EIS Fund

A Single EIS involves investing in a single company, whereas the others involve investing in different numbers of companies, therefore spreading the risk slightly.

Enterprise Investment Schemes offer multiple tax benefits. An investor can receive 30% upfront income tax relief provided the investment is held for three years.

Investors receive tax relief of 30% of the amount invested, up to £1,000,000 per year, against their income tax bill for this year (or the last tax year, if you choose). In an EIS 100% capital gains tax can potentially be deferred, as well as 100% inheritance tax exemption after two years. All capital gains in an EIS are tax-free.

Please remember that the value of an investment may fall as well as rise and an investor may not get back the full amount invested. Tax rules and regulations are subject to change.