Venture capital trusts (VCTs) are a form of investment trust which focus on investing in small companies that usually are not listed on a stock exchange.
A VCT itself is listed on a stock exchange and operated by a fund manager. As VCTs invest in smaller companies who need capital to grow and expand, they are associated with a higher degree of risk but can potentially offer higher returns to investors.
One of the major benefits associated with investing in VCTs is the income tax relief of 30% on a maximum investment of £200,000 per year. This tax relief is applicable to the purchase of newly-issued shares in a VCT and subject to holding the shares for five years. The tax relief cannot exceed an investor’s overall income tax liability for the respective tax year. Other benefits of VCTs are no capital gains tax to be paid (regardless of how long shares are held) and tax-free dividend payments.
There are many VCT types run by fund managers with a generalist VCT being the most common, this is a VCT that invests in a wide range of companies within different sectors. Specialist VCTs focus on a specific sectors and AIM VCTs focus on companies that are expected to listed on AIM in the near future or listed on AIM.