Introduction

Venture Capital Trusts (VCTs) are quoted companies that subscribe for shares in, and in some cases lends money to, small unquoted trading companies. Tax reliefs are available where VCT investments are made, which are intended to encourage investment into small unquoted trading companies. 

Both UK and non-UK resident individuals may be eligible for relief. Detailed conditions apply. Tax advice should always be taken, both on investment and in respect of any changes during the prescribed holding period. 

This briefing note provides an overview of VCTs. Similar tax reliefs are available under the Enterprise Investment Scheme (EIS) and the Seed EIS (SEIS). This note does not provide detail on EIS and SEIS, though does provide some points of comparison. Information on EIS and SEIS is available separately. 

Outline of the reliefs available

Provided all of the conditions are met throughout the relevant period, the following tax reliefs may be available: 

• Income tax relief of up to 30% of the amount subscribed for new ordinary shares in a VCT can be claimed. The maximum relievable investment is £200,000 per annum, resulting in tax relief of up to £60,000 per annum. Relief cannot be claimed against income in the previous tax year. 

• Dividends received by investors from qualifying ordinary VCT shares are exempt from income tax. 

• Qualifying ordinary VCT shares are exempt from Capital Gains Tax (CGT), which means that gains are not chargeable, but losses are not allowable. This applies both to newly issued and ‘second-hand’ shares (e.g. shares acquired through a stock exchange). 

It is not possible to defer capital gains arising on disposal of other assets by acquiring VCT shares. This point differs from EIS and SEIS, which do relieve gains made on disposal of other assets. 

A further difference between EIS, SEIS and VCT shares is that EIS and SEIS shares may be eligible for 100% business property relief from inheritance tax after two years but VCT shares are, in practice, ineligible for this relief.  

Conditions

Conditions must be met by the individual investor, the investor’s shares, the VCT itself and by companies in which the VCT invests. Notably: 

• The VCT’s own share capital must be listed on registered stock exchange, such as the London Stock Exchange or another EU regulated market. AIM is not a recognised stock exchange for the VCT’s shares. 

• At least 80% of the VCT’s underlying investments must be in unquoted trading companies carrying on a qualifying trade. Listing on AIM and PLUS markets is acceptable for this purpose. 

• Broadly, the companies in which the VCT invests must have objectives to grow and develop their trade in the long-term, and there must be a significant risk that the investment could result in the VCT losing more capital than it receives as its net investment return. 

• No more than 15% of the total value of the investments made by the VCT can be in a single company. 

• Income in the VCT must be wholly or mainly derived from shares or securities. HMRC consider this condition to be met if at least 70% of the VCT’s income is derived from shares and securities.

• At least 85% of the VCT’s gross income from shares and securities must be distributed by the VCT, unless the VCT is required to retain more than 15% of income by law, or if the distributable amount is less than £10,000 per annum. The £10,000 is proportionately reduced where the accounting period is less than 12 months.

• For income tax relief to be available the VCT shares must be new fully paid-up ordinary shares that do not have any terms which protect the investor from the investment risk. For the CGT and dividend exemption the shares can be ‘second-hand’ shares (i.e. the shares can be acquired from third parties, for example, through the London Stock Exchange), though the other above mentioned conditions must be met. 

• Income tax relief may be unavailable if an acquisition of VCT shares is ‘linked’ to a sale of shares in the same VCT, or if the acquisition and disposal occur within six months of one another. Relief is also unavailable on investments into ‘predecessor’ and ‘successor’ VCTs of VCTs into VCT investments have previously been made. 

For income tax relief to remain available, the conditions must be met both at the date of the investment and for the five years following the issue of the VCT shares. If the above conditions are not met throughout the five year period, any income tax relief claimed may be clawed back. 

Furthermore if at any time the shares no longer qualify as VCT shares, whether this is within the five year time period or after, any dividends received from the disqualification date will be subject to income tax and the CGT exemption on disposal of the VCT shares will be unavailable for growth in value from the disqualification date (investors will be treated as having disposed of and reacquired shares on the disqualification date). 

There is no minimum holding period for the purposes of the CGT exemption. 

Commercial issues 

VCTs can be attractive to investors both because of the available tax reliefs and because, unlike EIS investments, the investment is spread over a number of companies instead of making a direct investment in one company. That said, the investment is still higher risk and it is essential that appropriate investment advice is taken from an FCA authorised advisor. 

Investors should also be aware that there may be some difficulty in selling the shares. Income tax relief is only available on subscription for new shares, and so there may not be many potential purchasers of second-hand VCT shares. As such, VCT investments should only be considered as part of an overall investment strategy and, as noted above, advice should be taken from a qualified investment advisor before proceeding with an investment. 

VCT sunset clause

EIS and VCT relief are both currently legislated to expire for new share acquisitions made on or after 6 April 2025. However, at the Autumn Statement (22 November 2023), the government announced that it will legislate to extend the operation of the EIS and VCT relief scheme from 6 April 2025 until 6 April 2035.