investing in vcts

Should You Invest in VCTs?



Posted on: 24th June 2024

Many products in the investment market are open for investors to save money on tax and make positive contributions. One such opportunity comes in investing in VCTs, or Venture Capital Trusts.

If you are unaware of the presence of VCTs and what they can provide, they are companies in their own right that pool money and invest in small, unlisted companies – with the investors able to buy shares in them to benefit from the growth. At least 80% of these investments must be held in qualifying companies to be considered a VCT.

So how does a VCT benefit you, the Investor? As independent financial advisers Cheshire, Haven IFA knows that investors want to learn about potential tax benefits any investment opportunity holds. So let’s start there.

The Tax Benefits

The UK government wants people to invest in small companies operating within the UK. The primary benefit of a VCT is that it provides a significant 30% upfront income tax relief in addition to no income tax to pay on dividends or capital gains.

Admittedly, they are considered high-risk, but when using them correctly, they can have some amazing advantages. You must understand that the 30% income tax relief only remains valid when you hold that investment for a minimum of five years – and the relief is ‘up to’ 30%, not necessarily the full amount. You will require the generation of enough income tax in the same year you invest in the VCT to benefit from that full relief, and you cannot invest over £200,000 into a VCT each tax year thanks to a cap.

Second-hand VCT shares don’t offer the same tax benefits, so their market stands far more limited against listed shares – meaning they pose a bit more challenging to sell.

The Best Time to Invest in a VCT

While they pose great benefits, we must stress that VCTs are typically only the right choice for a few rather than everyone. Remember when we said that they are high-risk? That means they are suited more to those with other significant investments.

A VCT is typically a step for those already making the maximum pension contributions, using their ISA and annual capital gains tax allowances, and having a well-diversified investment portfolio across a range of asset classes and being managed by professionals overlooking their risk and returns. A VCT provides a great alternative to income tax relief for high earners in the £360,000 and above bracket.

VCTs are also an option for those using their tax-free allowances and have other taxable assets that produce significant capital gains, working as a diversifier when they wish to broaden their investments without compromising their capital gains tax standing.

Take Advice Before Action

You need to know if you stand to benefit from VCTs, as every situation is different and they are particularly specialist vehicles. Talking with independent financial advisers Manchester will give you the best advice on whether they are worth considering for your financial standing.

If you are interested in investing in VCTs and feel they match your position or have enquiries about pension advice Manchester and retirement planning Cheshire, talk with an adviser at Haven IFA to help you explore your options.