What is a VCT?
Venture Capital Trusts (VCTs) are companies listed on the London Stock Exchange that raise money to invest in unlisted innovative companies. They were introduced by the UK Government in 1995, as a way to encourage investment in early-stage and entrepreneurial start-up companies by offering investors tax incentives.
Both VCTs and the Enterprise Investment Scheme (EIS) were set to end on 6 April 2025, but in September 2024 both were extended by a further 10 years, until April 2035. Government statistics indicate that VCTs and EIS have generated over £41 billion of investment since their introduction.
Investment in a VCT involves a higher risk to an investor’s capital than investment in more established listed companies, which often have a long history of accounts available to demonstrate their financial viability.
Investors hold shares in the VCT, not the underlying investee companies. This means the investor can spread their risk across all of the investments made by the VCT.
Individuals can invest up to £200,000 per year in new VCT shares. Dividends received from VCTs are also tax-free.
What types of companies do VCTs invest in?
There are different types of VCTs. Some invest in start-ups generally, and others in sector-specific companies. An investor can choose which type of VCT they want to invest in.
In order for the investors of a VCT to retain their tax benefits, the investee companies must satisfy a number of conditions to maintain their qualifying status. A few examples are as follows:
- the company must have objectives to grow and develop in the long term;
- the investment must carry a “significant risk” to the investor that they might lost more capital than they gain as a return;
- it must have gross assets totalling no more than £15 million pre-investment, and £16 million post investment; and
- the company is subject to a maximum age limit and a maximum number of employees.
VCTs are risky, so what are the benefits?
Although risks are inherent in VCT investments, there are substantial tax benefits including that:
- an investor is entitled to income tax relief at a rate of 30% on the amount invested in new shares up to £200,000 invested in a tax year, provided that the investor’s VCT shares have been held for at least five years;
- the VCT itself will not pay tax on dividends received form its investments in qualifying UK companies provided that the distribution falls within one of the relevant exempt classes;
- an investor is also exempt from income tax on dividends received from the VCT in respect of shares acquired within the permitted annual maximum for income tax relief; and
- an investor is exempt from capital gains tax on any chargeable gains arising on disposal of the VCT’s shares.
These exemptions and reliefs are subject to certain conditions and restrictions, the technical detail of which is beyond the scope of this article.
Which companies have succeeded with VCT funding?
Companies that have received funding from VCTs in their early years include several household names, including property website and app Zoopla, online and retail healthy snack company Graze, and recipe box company Gousto.
At Brecher we advise both companies seeking investment from VCTs, underlying investors and VCTs themselves.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP
