Venture Capital Trusts (VCTs) are complementary to the
Enterprise Investment Scheme (EIS), in that both are designed to
encourage private individuals to invest in smaller high-risk
unquoted trading companies affected by the equity gap. While the
EIS requires an investment to be made directly into the shares
of the company, VCTs operate by indirect investment through a
mediated fund. In effect they are very like the investment
trusts that are obtainable on the stock exchange, albeit in a
high-risk environment.
What is a VCT?
VCTs themselves are quoted companies which are required to hold
at least 70% of their investments in shares or securities that
they have subscribed for in qualifying unquoted companies. VCTs
have a certain time period in which to meet the percentage test.
If a VCT sells a holding and breaches the test, the VCT is
allowed a six month period to reinvest cash received into
another qualifying investment.
Other conditions are:
- they must distribute 85% of their income
- they must have a spread of investments with no single
holding accounting for more than 15% of the value of total.
From 22 April 2009 the time limits concerning the
employment of money invested has been relaxed.
VCTs are exempt from tax on their capital gains and there
is no relief for capital losses.
Reliefs available to investors
Income tax relief of 30% is currently available on subscriptions
for VCT shares up to a limit per tax year of £200,000.
To qualify for income tax relief the shares must be held for
a minimum of five years.
Investors are exempt from tax on any dividends received from
a VCT although the credits are not repayable.
Capital gains arising on disposal of the shares are also
exempt and, for this relief, there is no minimum period of
ownership. There is no relief for any capital losses.
Qualifying companies
The definition of a qualifying company for VCT purposes is very
similar to that applying for EIS. The company:
- must be unquoted, although shares on the Authorised
Investment Market (AIM) are deemed unquoted for this
purpose. They may become quoted later.
- must not deal in land, leased assets or financial, legal
or accountancy services. In addition it must not be a trade
that has a large capital aspect to it, such as property
development, farming, hotels or nursing homes.
It has been confirmed in the 2010
Budget that certain changes to the qualifying conditions for
VCTs are being made to ensure that the scheme continues to meet
European State Aid requirements.
In summary the proposed changes
are:
-
VCT shares must be traded on
an EU regulated market rather than being restricted to an
official UK list
-
the rules governing the amount
of a VCT investments which must be held as equity, and the
types of shares qualifying will change
-
companies will be excluded
from qualifying for VCT purposes where it would be regarded
as an ‘enterprise in difficulty’ under the European
Commission’s guidelines.
How we can help
It is not possible to cover all the detailed rules in a
factsheet of this nature. If you are interested in investing in
a VCT please contact us for further information.
For information
of users: This material is published for the information of clients.
It provides only an overview of the regulations in force at the date of
publication, and no action should be taken without consulting the
detailed legislation or seeking professional advice. Therefore no
responsibility for loss occasioned by any person acting or refraining
from action as a result of the material can be accepted by the authors
or the firm.
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