A Venture Capital Trust (VCT) is a listed company, run by a fund manager, that invests in smaller companies that are not typically quoted on stock exchanges. Investments in Venture Capital Trusts carry tax reliefs to encourage you to invest in these smaller, higher risk companies. By pooling your investments with those of other customers, VCTs allow you to spread the risk over a number of small companies.
Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) both encourage investment in qualifying early-stage and seed-stage growth-focused companies by giving investors handsome tax and loss reliefs.
* This is increased to £2 million provided that anything above £1 million is invested in knowledge-intensive companies. There is no limit on CGT deferral.
^ Subscriptions into EIS can be used to defer capital gains (e.g. from selling a property). These gains can be from up to one year before and three years after the investment is made. 50% of a subscription into an SEIS can be taken off your realised capital gain. The SEIS subscription must be made in the same tax year that the gain is realised or the following tax year and then carried back.
VCT Example
See an illustration of a hypothetical VCT in the table below:
Total profit = Tax Relief of £3,000 + Dividends of £11,600 = £14,600 less original cost of £10,000 = £4,600 net profit
In reality, we recommend diversifying VCT investments as much as possible, within the constraints of minimum investments that providers set. We would generally advise to commit to the strategy for a few years so that a portfolio of VCT providers is built up, which helps to reduce the overall risk level through diversification.
High Earners
If you have used up an annual or lifetime pensions allowance and your annual ISA allowance, then you may already be familiar with tax efficient investments such as a VCT, EIS and SEIS. Listed below are some other reasons why you might benefit from investing in one of these tax-efficient products:
Offsetting tax on a capital gain
Selling a buy to let property
Sheltering investments from inheritance tax
Selling shares with an IHT problem
Extracting profits from a business
Managing chargeable events for single premium investment bonds
If you would like to discuss any of these scenarios or would like to hear more about our due diligence process for selecting VCT, EIS & SEIS investments, then please contact us.
William Buckley
Financial Planner
will@ifamax.com
N.B. It should be noted that VCTs, EIS & SEIS are very high-risk investments and you may lose your capital. It is recommended that investors take independent tax and financial advice from a qualified professional adviser before considering an investment. Tax benefits depend on personal circumstances and so are not guaranteed.
Nothing contained in this article constitutes or should be construed to constitute investment, legal, tax or other advice. The information contained in this article shall in no way be construed to constitute a recommendation with respect to the purchase or sale of any investment.