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What are Venture Capital Trusts? VCTs explained for investors – tax reliefs, risks, rules and more - YouTube
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A VCT, or Venture Capital Trust,
is an investment company listed on
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the London Stock Exchange.
It’s managed by a venture capital firm –
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names you might have heard of include
Octopus, Mobeus and Northern.
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It is a way for experienced investors
to get exposure to a portfolio of
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young, innovative and often
privately-owned companies.
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VCTs raise money from experienced investors
through share offers, and they
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invest that money into companies
that meet the VCT criteria
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set out by the government. These range
from startups to more mature businesses,
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in a wide variety of sectors. They can be
privately owned or listed on AIM.
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What they have in common is that they’re
relatively young, entrepreneurial and
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aiming to grow. Some VCT-backed companies
have gone on to be household names –
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for example Zoopla, Graze,
Gousto and Cazoo.
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Another example of a VCT-backed company
is Depop, the social marketplace
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where people buy and sell clothes
and fashion items.
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It was founded in 2011
and 10 years later, it has
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24 million users across the world
and $70 million in revenue.
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Octopus Titan VCT first
invested in the business
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in January 2018
and exited it in June 2021,
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when US ecommerce company Etsy
acquired Depop for $1.625 billion.
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Of course, not all investments
go on to succeed,
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and you can expect a
proportion to fail.
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When you hold shares in a VCT,
you have exposure to
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all of the businesses
the VCT invests in, which offers
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a degree of diversification.
You are eligible to receive any
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dividends the VCT issues to shareholders,
which are variable and not guaranteed.
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Investing in early stage businesses
is risky, so VCTs are higher risk and
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not for everybody. However, in order to
encourage private investors like you and me
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to invest, the government offers
generous tax incentives.
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So what are the tax benefits?
The first is income tax relief.
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When you invest in a VCT you get
income tax relief of up to 30%.
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For example: invest £10,000
in a VCT share offer
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and you could get back up to £3,000 in
tax relief, assuming you've paid or owed
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sufficient tax in the first place.
The maximum you can invest in a VCT
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per tax year is £200,000, so you could
save up to £60,000 in income tax.
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Any gains on holding VCT shares
are free from capital gains tax;
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however, typically any profit is
paid out as dividends –
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and VCT dividends are also tax-free.
This means that, compared to a VCT that pays,
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for example, a tax-free dividend of
5p per share, to get the same amount
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from an investment with a taxable dividend,
an additional rate taxpayer would need
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a dividend of 8.1p. Remember, dividends
are variable and not guaranteed.
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There are risks, of course, and
VCTs are not for everyone.
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As with all investments,
you could lose money.
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The risks are greater with VCTs
than with other stock market investments
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because they invest in small companies,
which are more volatile and likely to fail
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than their larger counterparts. You should
not invest money you cannot afford to lose.
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To keep the upfront tax relief
you need to hold your VCT shares
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for at least five years. Although
VCT shares are listed on the stock market
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they're not particularly liquid –
if you want to sell, you may not be able
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to do so quickly, and may have to
sell at a significant discount
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to the net asset value.
There are also restrictions
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on tax relief if investors
acquire and sell shares in
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the same VCT within six months.
You should take specific advice
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on the tax aspects if you are unsure.
Remember, the value of tax benefits
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depends on your circumstances,
and tax rules can change.
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For more information about
Venture Capital Trusts,
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please take a look at
the Wealth Club website.
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