Tax reliefs are different for investors in new shares issued by VCTs and investors who purchase second-hand shares, for example on the stock market. For second-hand shares, the reliefs are
exemption from income tax on dividends on ordinary shares in VCTs
For new shares, the same reliefs are available, and in addition
income tax relief at the rate of 30% on the amount subscribed for the shares. This relief is available on investments up to £200,000 in a tax year, if they are held for at least 5 years.
Compared with the issue price of new shares in VCTs, the price of VCT shares on the stock market tends to be lower, reflecting the absence of income tax relief.
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 or cash equivalents, gilts or bonds, or in some cases unit trusts / OEICs to attempt to maximise investor return. Within three years of the share issue at least 80% of the VCT's 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. These companies must have a permanent establishment in the UK and carry out a “qualifying trade”. The balance of up to 20% can be invested into areas such as government securities, gilts or blue-chip shares. VCTs may invest up to £5million 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 £15million, and the company must have no more than 250 employees. 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.
Types
VCTs can usually be classified according to the following criteria:
Generalist, AIM or Specialist: A generalist VCT invests primarily in unquoted companies from a diversity of industries; a specialist VCT focuses on a particular industry or sector such as healthcare or technology. An AIM VCT may also be generalist in nature but invests predominantly in AIM-listed companies.
Evergreen or Limited Life: VCTs that are set up to invest indefinitely may be called evergreen. A limited-life VCT is set to be wound up after the minimum five-year holding period in order for the assets to be distributed among shareholders.
Amount of money raised by VCTs
In the 2018/19 tax year, £731million was raised by Venture Capital Trusts. This was £3million more than the comparable figure for the previous year, in which speculation over whether the tax treatment of VCTs would be changed in the Budget caused a surge of investment in autumn 2017. The amounts raised since income tax relief was set at 30 per cent are as follows:
