You should never make investment decisions solely because of tax benefits. That said, the tax incentives available with Venture Capital Trusts (VCTs) are undeniably exciting.
And if you want to reduce your tax bill and generate tax-free income they are well worth looking into.
Please remember though: tax rules can change and benefits depend on circumstances.
VCT tax relief at a glance
30% income tax relief
This tax year you can invest up to £200,000 in VCTs 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.
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.
Many VCTs pay a tax-free dividend of around 5% – equivalent to a taxable dividend of 7.41% (higher-rate taxpayers) or 8.1% (additional-rate taxpayers).
A diverse, well established VCT portfolio can therefore produce the satisfying thud of dividend cheques on the doormat throughout the year. Indeed, during the 12 months to March 2018 the VCT sector paid out aggregate dividends of approximately £398 million.
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.
The value of tax-free VCT dividends
Obviously tax-free dividends are better than taxable ones. The question is: how much better? The table below shows what taxable dividend you would currently need to match different rates of tax-free yield.
|Equivalent to taxable dividend|
|Tax-free dividend||Higher-rate taxpayer||Additional-rate taxpayer|
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.
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|
|EIS||£2,000,000*||30%||deferral||no||yes||after 2 years||yes|
|SEIS||£100,000||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 often asked whether VCTs – particularly AIM VCTs – qualify for inheritance tax relief in the same way as 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 plc, not in its underlying holdings.
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 IHT portfolios or AIM ISAs. EIS investments and SEIS investments can also be IHT free.