Comment: Venture into a low-tax vehicle

By SCOTT MACKINTOSH
Published on 03/06/2012 00:00

There are many tax-reducing options available to investors, including pensions and ISA accounts. However, one investment method that is under-used is the venture capital trust (VCT)

If you can pick an experienced management team with the right infrastructure, a VCT should provide excellent tax-free returns, without correlation to the other assets in your portfolio, as well as offering 30 per cent income tax relief in the tax year. VCTs can provide investors with exposure to the most exciting, dynamic and rewarding investment sector there is – early-stage companies on the point of expansion.

VCTs were introduced by the UK Government in 1995 to encourage individuals to invest in UK smaller companies.

The government achieved this by offering investors in VCTs a series of very attractive tax benefits. As a result of these tax benefits, more than £4 billion has been invested in VCTs between 1995 and 2010.

All VCTs are quoted limited companies whose purpose is to invest shareholders’ funds in smaller unquoted trading companies, including stocks listed on the Alternative Investment Market, having potential for growth, with a view to making profits.

As such, all VCTs have independent directors whose objective is to protect the interests of investors in the VCT.

VCTs offer a series of tax advantages unmatched by any other kind of investment product in the UK. These include: income tax relief of 30 per cent on the amount invested (if you hold the shares for five years and invest between £3,000 and £200,000 per tax year), tax-free dividends and tax-free capital gains when you sell your shares in a VCT.

In hindsight, everyone probably wishes they could have bought into Google, Microsoft or Apple before they hit the stock market but very few people had the foresight to invest capital at that stage of a company’s life cycle.

This is precisely why the UK Government introduced VCTs.

As a financial planning solution, the unique tax benefits granted to VCTs make a compelling addition to certain personal portfolios. These investments can be risky and are not for everyone. As always, independent financial advice is key.

Scott Mackintosh is a director at EIC Ltd