A Venture Capital Trust (VCT) is a publicly traded company on the London Stock Exchange operating as a venture capital fund with the objective to invest in smaller, unlisted or AIM-listed companies. VCTs have strict criteria for qualifying investments, but they generally partner with young, entrepreneurial businesses. These businesses tend to have high growth potential, but are also higher risk.

Think of a VCT as an investment vehicle that allows investors to support the growth of emerging companies—businesses that might one day become household names but need capital to get there.

What makes VCTs particularly interesting is the suite of tax benefits they offer, designed to encourage investment in these riskier ventures.

When you invest in a VCT, you’re buying shares in the VCT itself and gain exposure to the fund's existing and growing portfolio. Investors don’t own shares in the portfolio companies themselves, however. The trust’s managers use capital raised from investors to invest in a diverse range of early-stage companies across various sectors—think tech startups and niche consumer brands.

The key goal for VCT managers is to help these companies grow and create value for investors by producing returns, which are aligned with the objectives of unlisted venture capital funds as well.

Despite being listed, the fund itself holds illiquid assets. Typically, VCTs will hold their investments for anywhere from three to seven years, before exiting and reinvesting in new opportunities.

Here’s a quick look at some of the key benefits VCTs offer:

• ‍30% Income Tax Relief: One of the biggest draws of VCTs is the ability to claim up to 30% upfront income tax relief on investments of up to £200,000 per tax year. This means you can claim up to £60,000 in income tax relief per year. However, to keep this benefit, you need to hold your VCT shares for at least five years and you need to have bought the shares during a new share issuance.
• ‍Tax-Free Dividends: Any dividends paid by VCTs are completely tax-free. This makes them especially attractive if you’re looking for a way to generate additional, tax-efficient income from your investments.
• No Capital Gains Tax: If the value of your VCT shares increases and you sell them after five years, you won’t have to pay any capital gains tax.

The combination of tax-free dividends and CGT exemption makes VCTs a highly tax-efficient option for investors.

While these tax incentives are appealing, it’s important to remember that they are subject to certain conditions—and VCT investments come with a higher level of risk. These tax reliefs are offered to compensate investors for the higher risks that VCTs present.

VCTs can offer appealing benefits, but they aren’t for everyone. Here are some of the key risks to consider:

• Higher Risk Companies: VCTs typically invest in younger companies that are still in their early stages of development. While these businesses have high growth potential, they’re also more likely to fail compared to larger, established firms. This means that the value of your investment can go down as well as up.
• Liquidity Challenges: VCT shares can be harder to sell than those of larger companies, which makes them less liquid. If you need to access your money quickly, you may find it difficult to sell your shares at a fair price. VCTs are best suited to investors who are comfortable tying up their money for at least five years.
• Minimum Hold Period: In order to retain the tax benefit associated with VCTs, investors must hold onto these investments for a minimum period of 5 years. If investors sell their shares prior to the 5 years, any upfront income tax relief that has been claimed must be repaid. This makes VCTs best suited for long-term investors who don’t need immediate access to their capital.
  
• Performance Volatility: The performance of a VCT depends on the success of the companies it invests in, which can be unpredictable. While some companies may soar, others may struggle, which means your returns aren’t guaranteed.
• Tax Status: If a VCT loses its status, then the tax reliefs described above may be withdrawn. The reliefs from taxation are subject to change with new government policy. Investors are advised to take their own independent financial advice on the tax aspects of their investment.

You can choose to sell your shares at any point, whether you purchase your shares during a new share issuance, or if you purchased on the secondary market. It’s important to note that VCT shares can be less liquid than traditional investments, which means you may not be able to sell your shares quickly or at a price that reflects their true value. You will need your VCT share certificate you received upon investment in order to sell your shares..

If you sell before the 5 year minimum hold period, you must notify HMRC and repay any income tax relief received. 

In any case, there are a few options for investors who want to sell their shares:

• Buy-back programs: Most VCTs offer “buy-back” programs to repurchase shares from existing investors at a discount to NAV. VCT managers typically offer a smaller discount than what you’d find on the secondary market, though it’s not guaranteed. However, these schemes are limited in scope as buyback programs are subject to VCTs cash reserves and only offered periodically.
• Secondary market: Since shares are listed, you can also sell shares via a share dealing account or a broker. However, given the different tax benefits for buying these assets in the secondary market, discounts are typically high and it may take longer to sell positions since activity is lower.

VCTs are designed to be long-term investments, and holding them for the full five years is essential to retain your income tax relief. After this period, many investors choose to stay invested to continue receiving tax-free dividends and retain diversified exposure to the funds’ underlying portfolios.

After completing your investment and your shares are allotted, you will receive a share certificate and a VCT tax certificate (keep these safe!)

‍You or your financial advisor will need to notify HMRC of the amount you have subscribed for in VCT shares, either by completing the appropriate section on your self-assessment form or by writing to them and enclosing the tax certificate issued with your shares.

You can also claim tax relief by adjusting your tax code. In this case, any changes to your tax will be implemented at source through PAYE. You can set this up by writing to HMRC and requesting a change to your tax code. You will need to enclose a copy of your tax certificate.

If you’re unsure about how to claim tax relief or want guidance on what option is most suitable for you, please refer to HMRC’s policies or speak to an accountant or advisor.