Venture Capital Trusts

What is a VCT?

Venture Capital Trusts are similar to Investment Trusts but they invest  in companies that are not quoted on the stock exchange, although they can be AIM (Alternative Investment Market) listed. VCTs must invest 70% of their funds in UK companies with gross assets of no more than £7 million at the time of investment. They can invest the remaining 30% in other ways from cash deposits through to riskier investments, including derivatives.

Investors in VCTs can get tax relief of 30%, freedom from any capital gains tax on their investment and no income tax on any dividends paid. However, investors must hold their VCT investment for five years - if you sell your VCT shares within five years, the Inland Revenue will claw back your tax relief. You should consider a VCT investment as long-term - many commentators suggest 7 to 10 years is necessary.

VCTs were devised in the 1993 Budget and launched in Autumn 1995. They are designed to give private investors an opportunity to back young growth companies while offering generous tax incentives. A VCT is managed by a specialist, hands-on venture capital manager who invests the fund’s assets in private, unquoted, OFEX and AIM listed companies. These are companies that have many of the same characteristics as the “small companies” that specialist OEICs target, but in the case of the VCT the companies are smaller and are usually at an earlier stage of development. Many of the arguments for investing in smaller companies apply to VCTs in that small entrepreneurial companies have the opportunity to grow at a much faster rate than larger mature companies. However, with companies that are at an early stage in their development there is an increased risk of failure.

That is why VCT managers should undertake very extensive due diligence before making an investment and have a very hands on role in the company’s development once the investment has been made. An advantage of VCTs over other investment companies is that a VCT has five years in which to invest its assets, rather than having to be fully invested from day one. Money can therefore be invested when the venture capital manager finds a company that has passed the due diligence tests. During the five year investment period most VCTs will keep the uninvested money safe in cash or near cash assets.