VCT Tax Relief
You should never make investment decisions solely because of tax benefits. That said, the tax incentives available with Venture Capital Trusts (VCTs) are undeniably attractive for some.
Please remember though: tax rules can change and benefits depend on circumstances.
VCT tax relief at a glance
Up to 30% income tax relief
You can invest up to £200,000 in VCTs per tax year, and receive tax relief of up to £60,000. To benefit, you must have paid or owe as much tax during the tax year in which you invest. To keep the relief, you must hold the investment for at least five years.
Tax-free income
Although most VCTs are growth investments, and any growth is tax free, the majority of returns (if any) are normally paid through tax-free dividends. After the sale of a successful company within the portfolio, the profit can be distributed to investors as a larger or special dividend, and the remaining capital reinvested in new opportunities. So, a diverse, well established VCT portfolio can therefore produce a satisfying stream of dividends throughout the year.
Moreover, the fact VCT dividends are tax free could be of significant value, especially now the tax-free allowance for dividends has been halved to just £1,000 (and will be halved again the next tax year).
If a VCT pays a 5% dividend, that means 5p in your hand for every £1. To match that, assuming the dividend allowance has already been used, a higher-rate taxpayer would have to get a taxable dividend of 7.55% (8.24% for a top-rate taxpayer). Note: dividends are variable and not guaranteed.
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How do I claim VCT income tax relief?
You can normally claim VCT tax relief when you file your tax return. You'll either reduce your tax bill for the year or receive a refund for tax you've already paid.
See our step-by-step guide to claiming VCT tax relief »
How do VCT, EIS and SEIS tax reliefs compare?
| Maximum investment | Income tax relief | CGT relief / deferral | Tax-free dividends | Tax-free growth | IHT relief | Loss relief | |
|---|---|---|---|---|---|---|---|
| VCT | £200,000 | 30% | no | yes | yes | no | no |
| EIS | £2,000,000* | 30% | deferral | no | yes | after 2 years | yes |
| SEIS | £200,000 | 50% | 50% relief | no | yes | after 2 years | yes |
The above table is a brief outline only: there are more detailed conditions and rules which you should consider carefully before investing. Tax rules can change and tax benefits depend on circumstances.
Are VCTs subject to inheritance tax?
We are sometimes asked whether Venture Capital Trusts, particularly AIM VCTs, qualify for inheritance tax relief in the same way that an AIM ISA does.
AIM VCTs do not qualify for IHT relief, even though their underlying holdings might. This is because when you invest in a VCT, you acquire shares in the VCT itself (listed on the main market of the London Stock Exchange), not in its underlying holdings listed on AIM.
Only when you hold shares directly in a company that qualifies for BPR could your investment be IHT free.
If IHT mitigation is a priority, you might consider AIM ISAs or IHT portfolios. Investments under the EIS and SEIS schemes can also be IHT free.