Venture Capital Trust
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A Venture Capital Trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide capital finance for small expanding companies and capital gains for investors.
First introduced by the Conservative government in the Finance Act, 1995 they have proved to be much less risky than originally anticipated. The last created VCTs to encourage investment into new UK businesses.
Investors can invest up to £200,000, increased from £100,000 in 2004. VCT shares issued after 5 April 2006 need only be held for five years to retain the initial income tax relief and capital gains tax deferral.
Typically VCTs aim to invest the majority of assets in qualifying companies, 80% of which are established companies or management buyouts.
[edit] Criteria
The managers of the VCT have three years in which to choose companies to invest in and during this time often place the money into cash, gilts or bonds. As they become more sophisticated VCTs are investing in funds such as smaller company funds or funds of hedge funds, to maximise returns.
A VCT must be held for a minimum of five years to benefit from the tax reliefs (increased from three years in April 2006). Within 3 years of the share issue at least 70% of the VCTs assets must be invested in 'qualifying' holdings. These are defined as holdings of shares or securities, including loans of at least five years duration, in unquoted companies and those whose shares are traded on the Alternative Investment Market (AIM). These companies must carry out a qualifying trade wholly or mainly in the UK. The balance of 30% can be invested into areas such as Government securities, Gilts or Blue Chip shares.
VCTs may invest up to £1m in a qualifying company but each individual investment cannot make up more than 15% of VCT assets. The gross assets of the company into which the VCT invests must not exceed £7m or £8m following the investment. If an investment is held in a company that becomes quoted on the London Stock Exchange then it can continue to be treated as a qualifying VCT investment for up to five years.
[edit] Types of VCT
VCTs can usually be separated into three different types: AIM, Technology and General. Some trusts invest in a combination of all three areas. Recently, VCTs have started to become more focused and some invest only in one sector e.g. media or healthcare.
