Resources List
UNDER Venture Capital Trusts
Frequently Asked Questions
How can I buy VCT shares?
There are two primary ways to purchase VCT shares:
1) Through a new share offer
You can invest by subscribing to a VCT when it’s open for new investment (referred to as a ‘new share offer’). This process involves reading the prospectus, completing an application form, and making a payment. You can do this directly, via an online broker, or with the help of a financial adviser. Due to the high-risk nature of VCTs, it’s strongly recommended to seek advice from a financial adviser before making an investment decision.
2) Buying existing shares on the open market
Since VCTs are listed companies, you can also purchase existing shares through the stock market, typically via a stockbroker. These ‘second-hand’ shares do not offer upfront income tax relief but still provide access to tax-free dividends and potential growth. It’s important to note that second-hand VCT shares count towards the £200,000 annual tax-free limit.
Regardless of the method you choose, carefully reviewing the relevant information and considering any associated costs is essential. Be sure you understand the risks involved before investing.
How can I sell VCT shares?
The market for second-hand VCT shares is limited, as they do not provide upfront income tax relief. As a result, selling VCT shares at a favourable price can be challenging. Many VCTs offer a ‘buyback’ scheme, where they purchase shares at a small discount to their Net Asset Value (NAV), typically around 5-10%. However, these schemes are not guaranteed and depend on the VCT’s cash reserves.
You can also sell VCT shares through a stockbroker or a share dealing account, but keep in mind that the quoted price may not fully reflect the NAV. If you sell your shares before the minimum five-year holding period, you will need to inform HMRC and repay any income tax relief you have claimed.
How do I claim my income tax relief?
After investing in a VCT, you will receive two certificates:
1) Share Certificate
This confirms how many VCT shares you own and should be kept safe, as you’ll need it if you decide to sell.
2) Tax Certificate
This certificate enables you to claim income tax relief from HMRC. You can adjust your tax code immediately by contacting HMRC or claim the relief through your Self Assessment tax return at the end of the financial year.
What happens to my VCT shares when I die?
When you pass away, your VCT shares become part of your estate. Your beneficiaries can choose to either sell the shares or transfer them into someone else’s name. If you die within five years of holding the investment, your estate will not be required to repay any claimed tax relief. Additionally, dividends will remain tax-free, and no capital gains tax will be due on any growth when the shares are sold.
Advantages and disadvantages of VCTs
Investing in VCTs offers both benefits and risks.
Advantages:
- Exposure to early-stage companies with high growth potential.
- Up to 30% income tax relief on investments of up to £200,000.
- Tax-free dividends, often providing a regular income stream.
- Profits from selling VCT shares are exempt from capital gains tax.
- Helps diversify an investment portfolio by including companies in different stages of growth.
- Supports the growth of smaller UK businesses, contributing to innovation and job creation.
Disadvantages:
- Early-stage companies present a high level of risk, and the value of investments may decrease, possibly to zero.
- Smaller companies are more volatile and harder to sell than those listed on the main stock exchange.
- Tax relief is not guaranteed and depends on current legislation, which could change in the future.
- VCTs are long-term investments, requiring at least a five-year holding period to retain tax benefits.
- Tax advantages rely on the VCT maintaining its qualifying status and vary based on individual circumstances.