A Venture Capital Trust (VCT) is an investment vehicle designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange.Its main attraction is the tax relief it can provide. It offers 30 per cent tax relief up front.
A VCT has to hold at least 70 per cent of its portfolio in companies that qualify under Venture Capital qualifying rules. No company it invests in can have gross assets in excess of £7m, and none is allowed to make up more than 15 per cent of the portfolio.
With a VCT, you can invest up to £200,000 per tax year in ordinary shares and qualify for 30 per cent income tax relief as long as you hold the shares for at least five years (three years for a VCT bought before 6 April 2006). There’s no CGT on disposal (but also no CGT relief on losses). Dividends are exempt from income tax.
All this makes for a potentially attractive package. But what if you’ve already invested your £200,000 for the year, or are worried about understanding the investment risk of VCTs? Fortunately, there are alternatives to VCTs that offer similar benefits.
An EIS is an investment in a single unquoted, privately held company. With such an investment, there’s also an opportunity to participate in the running of the business – and to get paid for doing so.
With an EIS, you can invest up to £500,000 and receive 20 per cent income tax relief if you hold the investment for three years. Gains are CGT free on disposal of shares after five years, and you can defer CGT gains on other assets by investing them into an EIS – something not available with a VCT.
The BPRA, or Business Premises Renovation Allowance, gives you 100 per cent capital allowances on refurbishment spend. It offers marginal rate tax relief up to 50 per cent for premises unused for 12 months. There’s a holding period of seven years – and usually at least one year of works, so this might total eight years. And there’s a limited recourse loan secured only on property and the other assets of the partnership tax relief claimed in your self-assessment tax return.
While unsuitable for novice investors, more experienced and wealthier investors might want to consider these as part of their portfolio.
As always, expert advice can help you find the right vehicles for your circumstances. At Welbeck, we’re experts in introducing clients to tax planning specialists. What’s more, we always tailor our introductions to your specific needs and goals. If you’d like to explore the alternatives to VCTs in more detail, or of course to set up a VCT for the first time, contact us today to set up a meeting.