Introduction

First launched in 1995, VCTs were established to provide a vital source of funding to small and medium-sized businesses in the UK. Since then, they have helped to create thousands of jobs, fuel innovation and stimulate the growth of some of the country’s most promising smaller companies.

Young, entrepreneurial businesses often struggle to raise finance from traditional sources like banks. Yet, they often need significant capital investment in the early years to fuel growth. VCTs can bridge this gap. They achieve this by pooling money from investors to invest in a diversified portfolio of private companies to spread risk.

Though these companies may start small, some will eventually become household names in the future.
The government encourages investment in VCTs by providing generous tax benefits, but you should not invest in a VCT just for tax benefits. If you are in any doubt as to the suitability of a VCT for your individual circumstances, you should always seek professional independent financial advice.

Ways to invest

Investing in VCTs can be carried out in two primary ways:

• New Shares: One way to invest in a VCT is by purchasing new shares when a VCT launches a new issue. This can be done directly or through a financial adviser who specialises in these types of investments.
• Secondary Market: Another way to invest in a VCT is by purchasing existing shares from another investor on the secondary market. However, this is rare as those buying will not benefit from the same tax reliefs that are available for investors in new shares issued by a VCT.

Type of companies that are held in a VCT

VCTs invest in small, unlisted companies that are looking for funding to help them grow. These companies are generally:

• Unlisted, meaning their shares are not traded on a recognised stock exchange.
• Have a gross asset value of no more than £15 million before investment and £16 million immediately after.
• Have fewer than 250 employees.
• The company must have a permanent establishment in the UK.
• Generally, the company must be less than seven years old.
• The Company must receive its first risk finance investment no later than seven years after its first commercial sale.
• The Company cannot raise more than £12m in its lifetime.
• The investment must be used for a qualifying business activity, typically a trade carried on with the intention of making profits. Certain activities, such as banking, farming, and property development, are excluded.

They are often in sectors such as technology, biotech, green energy, and other high-growth potential sectors. However, they can also be in traditional sectors that are innovating and expanding.

Tax reliefs associated with VCTs

There are several tax reliefs associated with investing in VCTs:

• Income Tax Relief: Investors can claim up to 30% income tax relief on VCT investments up to £200,000 per tax year, provided the VCT shares are held for at least five years.
• Dividend Tax Relief: Any dividends received from VCT shares are tax-free, regardless of the investor's tax rate.
• Capital Gains Tax Relief: Any gain made when VCT shares are sold is not subject to Capital Gains Tax.

Please note these tax reliefs are subject to change and depend on the VCT maintaining its VCT-qualifying status.

Key benefits of a VCT investment

• Diversification: VCTs provide a means for investors to gain exposure to small, high-growth companies that they would not normally have access to.
• Tax Incentives: As discussed, the tax benefits of investing in VCTs can be substantial. 
• Potential High Returns: While risky, investments in growth companies can potentially offer high returns if the companies perform well. 
• Supporting Innovation and Job Creation: VCT investments can support innovative companies and contribute to job creation in the economy.