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Venture Capital Trusts (VCTs)

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Venture Capital Trusts (VCTs)

Learn more about investing in VCTs with interactive investor.

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What are VCTs?

Venture Capital Trusts (VCTs) started life in 1995. They were launched to encourage investment in early stage companies by offering attractive tax breaks to investors, in the form of 30% initial tax relief for investments up to £200,000 a year and tax-free dividends. 

VCTs invest in young entrepreneurial companies that are unquoted, with a relatively recent rule change requiring VCTs to invest in businesses that are typically less than seven years old. As such, these underlying investments carry considerably higher risk than do listed businesses on the London Stock Exchange. In return for taking that risk, VCT shareholders get a variety of generous tax breaks.

VCTs advantages and disadvantages

Benefits and risks associated with VCTs investing 

VCTs are highly tax-efficient, offering 30% income tax relief as long as the shares are held for five years, plus tax-free dividends and no capital gains tax on profits on the disposal of VCT shares. Investors can put up to £200,000 into VCTs each year. 

VCTs attract high earners (who should also be sophisticated investors) with few other options: they have reached their limits for pension contributions and used up their dividend tax allowance. As a general rule of thumb, if you pay 40% or 45% tax and have maxed out your pension and ISA, then VCTs are worth considering.  

The tax incentives are attractive, but it is important to remember the tax tail should never wag the investment dog. Performance overall has been creditable for VCTs, albeit some way behind mainstream equity markets. Over 10 years, the average generalist VCT has produced a share price total return of 123% (as at 17 July 2020), according to the Association of Investment Companies. This compares with 149% for the average UK all-companies investment trust. 

Over the past couple of years, VCTs have become riskier propositions as they are now required to invest in earlier-stage companies, mainly those that have been trading for less than seven years. In addition, the investable universe for VCTs has become more limited, with management buyouts excluded and investments in asset-backed firms restricted. One the one hand investing in younger businesses could lead to high returns, but at the same time risk is increased. 

It is important to point out that VCTs are complex products and are only suitable for sophisticated investors. Please ensure you understand the risks involved. If you are unsure about the suitability of any investment please seek financial advice.

Advantages

  • Investors can receive income tax relief of 30% on up to £200,000 invested in newly issued shares held for at least five years
  • Dividends paid out by VCTs are tax-free
  •  All capital gains on sale of shares are also tax-free

Disadvantages 

  • The underlying investments in VCTs are high-risk and have become riskier over the past couple of years, due to rule changes 
  • Charges levied by VCT provider tend to be high – around 1.75% to 2% a year is typical. In contrast funds and investment trusts tend to cost 0.85% to 1% a year. 
  • Tax benefits for VCT investors could at some point be taken away or changed 

Types of VCTs

Generalist VCTs

These VCTs invest in a wide range of companies in different sectors and stages of development.

AIM VCTs

As the name suggests they only invest in companies listed, or about to become listed, on the Alternative Investment Market (AIM).

Specialist VCTs 

Tend to focus their investment expertise on one particular sector, e.g. Healthcare.

Limited Life VCTs

 Set out on a 5+ year plan and will wind up the VCT at the end of this period.

VCTs Tax Rules and Benefits

Venture capital trusts (VCTs) are collective funds that take stakes in small companies that investors would generally regard as high-risk. VCT investors get a variety of generous tax breaks in return for committing their cash to those high-risk investments. These include:  

  • upfront income tax relief of 30% on investments of up to £200,000 in new VCT shares
  • tax-free dividends 
  • tax-free capital growth 

Are VCTs right for me?

Investors should feel comfortable that they meet the following criteria:

  • High net worth and sophisticated investors who are UK residents.
  • Investors who have a sufficient income tax liability to reclaim income tax relief at 30% of the amount subscribed.
  • Investors who have realised a capital gain that would attract Capital Gains Tax.
  • Investors who will not need access to their capital for at least five years and are comfortable with higher risk investments.

Why choose ii

✔  We charge a market-leading one-off fee of £30 (inc VAT) to process your VCT application.

✔  Most VCT Managers offer broker discounts, which we will reinvest fully for you in new shares.

✔  Unlike some brokers we credit all the trail income we receive from your VCT investments as cash in your account.

Current VCTs Offers

Here we list current VCT offers available for investment through interactive investor. Before investing, please ensure you have read and understood the key documents and 'how to apply through ii' information below.

Calculus VCT Offering

Legal name(s) Calculus VCT plc
Type Generalist
Minimum investment £5,000
Amount raising £10m with £5m over-allotment facility
Initial charge 5.0%
Total discount 3.0% (3.5% for existing Calculus VCT investors) if you apply before 29 January 2021, 2.0% (2.5% for existing Calculus VCT investors) thereafter

Key documents

Downing ONE VCT Offering

Legal name(s) Downing ONE VCT plc
Type Generalist
Minimum investment £5,000
Amount raising £15m
Initial charge 4.5%
Total discount 2.25% plus an additional 1% early bird discount (1.5% for existing Downing VCT investors) if you apply before 11 December 2020

Key documents

Foresight Williams Technology VCT Offering

Legal name(s) Foresight Solar & Technology VCT plc
Foresight Williams Technology shares of 1p each in the Company (“FWT Shares”)
Type Generalist
Minimum investment £3,000
Amount raising £20m with £10m over-allotment facility
Initial charge 5.5%
Total discount 4.0% (4.5% for existing Foresight VCT investors) until 31 July 2020 or £5m raised (whichever is soonest) and 3.0% (3.5% for existing Foresight VCT investors) thereafter

Key documents

Octopus AIM VCTs Offering

Legal name(s) Octopus AIM VCT plc
Octopus AIM VCT 2 plc
Type AIM
Minimum investment £5,000
Amount raising £20m with £10m over-allotment facility (max £18m for AIM VCT and £12m for AIM 2 VCT)
Initial charge 5.5%
Total discount 2.5% (3.5% for existing Octopus VCT shareholders)

Key documents

Octopus Apollo VCT Offering

Legal name(s) Octopus Apollo VCT plc
Type Generalist
Minimum investment £5,000
Amount raising £25m with £10m over-allotment facility
Initial charge 5.5%
Total discount 4.5% (5.5% for existing Octopus Apollo VCT investors) if you apply before 15 December 2020. 2.5% (3.5% for existing Octopus VCT investors) thereafter

Key documents

Puma Alpha VCT Offering

Legal name(s) Puma Alpha VCT plc
Type Generalist
Minimum investment £5,000
Amount raising £20m with £10m over-allotment facility
Initial charge 3.0%
Total discount 2.5% until 30 September 2020

Key documents

Puma VCT 13 Offering

Legal name(s) Puma VCT 13 plc
Type Generalist
Minimum investment £5,000
Amount raising £7.5m with £2.5m over-allotment facility
Initial charge 3.0%
Total discount 2.0% (3.0% for existing Puma VCT investors) if you apply before 18 December 2020. 1.0% (2.0% for existing Puma VCT investors) thereafter

Key documents

 

How to apply through interactive investor

Step 1:

To apply you need a Trading Account.

Step 2:

As VCTs are classified as a Complex Instrument you must first complete our online appropriateness assessment, which can be found when you log in to your Trading Account. Choose the ‘personal details and preferences’ option from the ‘account’ tab, then select ‘Appropriateness Assessment Form’ from the ‘Account Information’ section. On successful completion we will be able to process your application. The assessment only needs to be completed once.

Step 3:

Please follow the instructions on the application form of your chosen VCT and post to the following address enclosing a cheque for the amount you wish to subscribe made payable to the VCT manager/provider:

Interactive Investor
Corporate Actions Department
201 Deansgate
Manchester
M3 3NW

Please write your interactive investor account number at the top of your application form

We charge a flat fee of £30 per application – please ensure there are sufficient funds in your Trading Account to cover this fee. If insufficient funds are available the application process may be delayed.

In order to receive the tax benefits that VCTs can offer the application must be in your own named account.

Your application must be received by us a minimum of 3 working days prior to the VCT application closing date. This includes any early bird offer specified dates.

Step 4

We will finalise your application and send to the company, and where possible you will receive your new VCT shares electronically in your trading account as default. If you would prefer to receive a share certificate, please let us know along with your application. If you choose to reinvest your VCT dividends with the VCT manager/provider, you will receive a share certificate.

VCTs FAQs

Investors need to be aware of when they buy and sell VCT shares in order to attract and keep the tax advantages. The income tax relief of 30% on investments of up to £200,000 in new VCT shares must be repaid if the VCT shares are not held for five years. Those who want to sell VCT shares will need to have their VCT share certificate to hand. 

Those who have lost their share certificate should firstly contact the VCT provider who issued the VCT share certificate and VCT tax certificate. The latter enables individuals to claim VCT tax relief. 

No, AIM VCTs do not qualify for inheritance tax relief. However, private investors can create their own portfolio of Aim shares qualifying for business property relief, which can be passed on free of inheritance tax after they have been held for two years and provided they are still owned at death. Aim shares can be held in a stocks and shares ISA. 

VCT popularity has tended to trump that of other products such as enterprise investment schemes (EIS). This is because the small companies VCTs back while they are at an early stage in their development are, nevertheless, more established than the start-up businesses held in EIS schemes. Investors who invest in EIS schemes for a minimum period of three years benefit from 30% tax relief. But one key difference between VCTs and EIS is that investments in an EIS-qualifying company can help mitigate against inheritance tax, provided the investment is held for two years and at the time of death. 

The companies held in seed enterprise investment scheme (SEIS) are even smaller than those held in EIS in schemes in terms of turnover and number of employees. As a trade-off for the higher risks involved, investors are offered an even bigger tax break. By committing cash to SEIS for three years, the investor benefits from a 50% income tax break. 

New to interactive investor?

Open a Trading account to invest in Venture Captial Trusts. VCTs are classified as a Complex Instrument so you will need to complete our online appropriateness assessment once you have opened your account.

Already an ii customer?

As VCTs are classified as a Complex Instrument you must first complete our online appropriateness assessment, which can be found when you log in to your Trading Account.