Investing in Venture Capital Trusts: what you need to know
Venture Capital Trusts (VCTs) are publicly listed closed-end funds. They are crafted to provide individual investors access to venture capital investments through regular capital markets. This is achieved through VCT fund managers working to generate above-average returns for investors by identifying potentially profitable investments in small unlisted firms. As any investment is always spread across several different companies, VCTs inherently provide diversification. However, the potential risk is a lot higher than investing elsewhere, such as in the FTSE 100.
VCTs also offer a number of tax benefits, as neither income tax nor capital gains tax is due on money generated through them, making them similar to investing in an ISA. However, the tax relief for VCTs is much higher: an annual maximum of £200,000, compared to just £15,000 for an ISA.
The greatest benefit, however, is that investors are granted “income tax relief” on their income tax liability, wherever this income may arise from. This means that any income tax liability up to 30% of the amount invested in the VCT during a tax year can be written off by the investor as long as they keep the VCT for five years. After this time, the money can be reinvested into a VCT to benefit from the tax relief again without incurring additional fees.
It’s a relatively straightforward process to invest in a VCT. Shares in VCTs are bought through a trading platform in the same manner as regular shares, ETFs and other investments. Discounts on initial registration fees are offered by the majority of brokers, which are usually more significant earlier on. This is because there is a limited amount of investment available in a VCT, so the discount decreases as the fund gets closer to capacity.
So, are VCTs the right type of investment for you? If you’ve reached your ISA limit, then they could be a viable option for further investment and the 30% income tax relief can also make them an attractive option to add to your portfolio. However, the high risk nature of VCTs should not be ignored – if you’re looking for a safe investment then they might not be the right option.
As with any form of investment, consider your individual position and seek financial advice to determine whether VCTs are right for you.