In a previous post, we discussed ways to decrease your tax liability by investing in companies registered under the SEIS and EIS schemes. These schemes are a highly tax-efficient, though tax relief obtained by investors are offset by the high-risk nature of the investment. Another invesment vehicle, similar to the EIS, are VCTs.
VCTs were introduced by the Government in 1995 to stimulate investment in smaller UK companies. There are now assets of over £6 billion invested with the scheme. As with EIS, tax reliefs include 30% Income Tax Relief on your investment provided that you hold the investment for five years (with EIS the minimum investment period is three years).
The amount of relief you can claim is linked to your annual income tax liability. The maximum relief you can claim in a single tax year is £60,000 from a maximum subscription of £200,000 in a given tax year.
Income tax relief can be used against all forms of income tax paid, including dividends and rental income. Another advantage is that Capital Gains Tax (CGT) is not applicable to any capital growth in the value of your VCT investment. Dividends received from your VCT are also tax-free.
Other benefits include high growth potential, portfolio diversification, as well as the fact that VCTs are public companies listed on the London Stock Exchange, and as such they adhere to governance standards which offer greater protections than EIS.
As mentioned above, VCTs are high-risk as tax rules are subject to change, investing in small companies is inherently risky, the secondary market for shares is limited and if you sell your shares early, you will lose the income tax relief.
If you are interested in VCTs and how they might provide a different type of long-term investment, please get in touch.