Venture Capital Trust (VCTs) and tax

Venture Capital Trusts were schemes introduced in 1995 to encourage individuals to invest in high-risk trading companies.

With a VCT the risk of the investment is spread over a number of companies.

VCTs must be approved by HMRC and must meet a certain qualifying conditions.

If you have subscribed for shares in Venture Capital Trusts and you are 18 or over when the shares were issued you are entitled to a few tax reliefs.

According to HMRC, these are the tax reliefs for investing in VCTs:

Income tax relief:

One of the income tax reliefs of VCTs is that you are exempted from income tax on dividends from ordinary shares. This is called dividend relief;

Another very important tax relief when investing in a VCT is called income tax relief .

The amount of the tax relief will be the smaller of the amount subscribed up to a maximum of £200,000 at 30% or the amount that reduces the tax bill to zero for the year.

The rate of 30% applies in the tax year 2006/07 and onwards and for subscriptions for shares issued in previous tax years the rate is 40%.

Capital gains tax (CGT) relief :

One of the CGT reliefs when investing in VCT schemes is called disposal relief as you may not have to pay CGT on any gain you make when you dispose of your shares. In order to qualify for the reliefs certain conditions need to be met. You can find more about them on HMRC website.

As there are no guarantees that VCT investments will be successful, Taxfile‘s tax agents recommend that you seek professional advice from financial advisers beforehand.

Types of tax-free investment

There are a number of ways investors can reduce their tax liability. Here are the most popular:

Cash Mini ISAs
These are basically ordinary saving accounts but the interest you accumulate is free from tax.
Anyone over 16 can put up to £3000 per tax year into a cash mini Isa. The good news is that from April 2008 you would be able to place up to £3600 each year in a mini cash Isa.

Share ISAs
These are accounts in which you can hold stock market-type investments such as shares. The money grows free of capital gains and income tax. Higher rate taxpayers also avoid paying extra tax on dividends payments from shares, and they don’t have to declare their Isas on their tax returns.

There are two types of shares Isas – maxis and minis. For the 2007/08 year you may invest £7,000 in a maxi equity Isa. If you have a cash mini Isa you may also invest £4,000 in a mini equity Isa.

For 2008/09, the overall limit increases to £7,200. So if you have used the new maximum cash mini Isa allowance of £3,600, the maximum you may place in a stocks and shares Isa is £3,600, bringing your total Isa investment to £7,200.

Venture capital trusts
VCTs have traditionally offered one of the best tax breaks available, although they have recently lost their shine as tax breaks were cut and extra restrictions imposed.
VCTs are high risk – they are effectively companies quoted on the stock exchange which invest mainly in unquoted companies or ‘start-ups’.
At the time of writing, investors were entitled to 30% income tax relief. It means that every £10,000 you invest will only cost you £7,000 because of the tax break. There is no income tax to pay on any dividends, nor capital gains tax to pay on the increase in your stake in the trust.
To check these figures are up to date and for current rules about tax breaks offered to investors in VCTs visit the HMRC website at http://www.hmrc.gov.uk/guidance/vct.htm.

Offshore investing
Investing offshore provides opportunities for tax suspension, reduction and avoidance.
The attraction is ‘gross roll-up’. This means assets can grow without being taxed and could therefore outperform investments at home. However, gains or income are liable to tax in Britain when they are brought back to the UK. You will also need to pay tax of another country if you take the money there.
The trick is to take into account how long you are going to be away if you are emigrating, your residency for tax purposes, your will, property and more liquid assets such as savings.
Always seek professional advice from a tax company like Taxfile with offices in South London when it comes to ways of minimizing your tax liability.