Venture Capital Trusts (VCTs) – MICAP

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Investment Guide INVESTMENT GUIDE Overview EIS/SEIS Market Snapshot VCT Market Snapshot Enterprise Investment Scheme (EIS) Seed Enterprise Investment Scheme (SEIS) Venture Capital Trusts (VCTs) Tax Treatment (EIS, SEIS, VCT) Business Relief (BR) Key Risks Venture Capital Trusts (VCTs) are investment companies which typically invest in unquoted trading companies, and are listed on regulated markets such as the London Stock Exchange. VCTs were launched in 1995 as vehicles to encourage UK taxpayers to invest in smaller, higher-risk UK unlisted companies which needed start-up, early stage or growth capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis. A VCT often offers exposure to a professionally run portfolio of equity (and often also debt) investments in privately owned companies, and also placements of shares that are traded on the smaller markets, such as the AIM market of the London Stock Exchange and also more junior markets such as the Acquis Exchange. The fund manager appointed by the VCT to manage its funds, invests in companies to seek to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value. However, as with any investment, capital is at risk and investors should remember that VCTs are buying shares in and lending money to smaller, often privately-owned and younger companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies. VCTs make an important contribution to the UK economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £10 million and so are beyond the means of most individual investors. VCTs themselves are subject to regulation by tax law, company law and the listing rules of the stock exchange on which they are listed. VCTs commonly fall into three broad sectors: generalist (which covers private equity including development capital), AIM and specialist sectors e.g. technology or media. In some cases, an older VCT with a certain investment strategy (such as a renewable energy investment strategy) may have this ring-fenced in a share class that is closed to further investment, and the VCT may have introduced other share classes alongside the closed share class. Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made on an investment made by the VCT). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT. Historically, there have been VCTs that aimed to exit from all of their investments, wind up the VCT and return all capital to their investors after a defined term (of, say, eight years). These planned exit VCTs typically focus on investments with a higher degree of asset backing or contractual income, as this can make exiting from these companies at a defined point in the future more predictable. However, with the introduction of the “risk-to-capital” condition (effective for all investments made by a VCT on or after 15 March 2018), planned exit VCTs are now relatively rare. In some cases, an ongoing VCT may have a historical planned exit share class but, more recently, they may have introduced other share classes for the VCT which have an evergreen strategy. VCT investments aim to offer: tax free capital growth tax free dividends income tax relief at up to 30% In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in the VCT losing its status and a withdrawal of the tax reliefs for all investors within their 5-year restricted period (as well as a removal of the tax-free dividend status going forward). Investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest. For further details of the investment risks please see the Key Risks section of this website and for further details of the tax advantages please see the Tax Treatment section of this website. Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.
The MICAP Impact Assessment process is based on the Manager’s answers to our Impact Assessment Questionnaire, which may not be verified or audited by MICAP. The resultant MICAP Impact Scores should not be taken as financial advice or a complete and comprehensive analysis of the risks of investing in the investment, which are usually set out in the Information Memorandum, Prospectus or Brochure supplied by the Investment Manager. Alternative and unquoted investments are inherently high risk and invested capital is at risk. Tax ramifications may vary depending on the investor's personal circumstances. MI Capital Research Ltd is an Appointed Representative of Thornbridge Investment Management LLP (FRN: 713859), which is authorised and regulated by the Financial Conduct Authority.

Venture Capital Trusts (VCTs) are investment companies which typically invest in unquoted trading companies, and are listed on regulated markets such as the London Stock Exchange.

VCTs were launched in 1995 as vehicles to encourage UK taxpayers to invest in smaller, higher-risk UK unlisted companies which needed start-up, early stage or growth capital. VCTs pool investors’ money and normally appoint a regulated fund (investment) manager who manages the fund on a day-to-day basis.

A VCT often offers exposure to a professionally run portfolio of equity (and often also debt) investments in privately owned companies, and also placements of shares that are traded on the smaller markets, such as the AIM market of the London Stock Exchange and also more junior markets such as the Acquis Exchange. The fund manager appointed by the VCT to manage its funds, invests in companies to seek to maximise the return to shareholders, subject to the stated objective of the VCT. The fund managers tend to work with or advise their privately-owned companies over the long term and aim to help increase their value. However, as with any investment, capital is at risk and investors should remember that VCTs are buying shares in and lending money to smaller, often privately-owned and younger companies which, due to their nature, should be viewed as higher risk than investing in larger, more established companies.

VCTs make an important contribution to the UK economy by investing in small to medium sized growth businesses that often promote innovation, industrial change and modernisation of working practices. Investee companies may struggle to access traditional forms of debt and so need other sources of finance. The amounts of capital these companies require often varies between £100,000 and £10 million and so are beyond the means of most individual investors.

VCTs themselves are subject to regulation by tax law, company law and the listing rules of the stock exchange on which they are listed. VCTs commonly fall into three broad sectors: generalist (which covers private equity including development capital), AIM and specialist sectors e.g. technology or media. In some cases, an older VCT with a certain investment strategy (such as a renewable energy investment strategy) may have this ring-fenced in a share class that is closed to further investment, and the VCT may have introduced other share classes alongside the closed share class.

Most VCTs pursue an evergreen strategy, which means that the VCTs do not intend to wind up in the foreseeable future and exit proceeds from the realisation of investee companies are typically reinvested into new investee companies (although special dividends may be paid to investors where a gain is made on an investment made by the VCT). Investors will typically exit from evergreen VCTs by selling their shares on the exchange on which the VCT is listed, or by availing of any share buy-back policy offered by the VCT.

Historically, there have been VCTs that aimed to exit from all of their investments, wind up the VCT and return all capital to their investors after a defined term (of, say, eight years). These planned exit VCTs typically focus on investments with a higher degree of asset backing or contractual income, as this can make exiting from these companies at a defined point in the future more predictable. However, with the introduction of the “risk-to-capital” condition (effective for all investments made by a VCT on or after 15 March 2018), planned exit VCTs are now relatively rare. In some cases, an ongoing VCT may have a historical planned exit share class but, more recently, they may have introduced other share classes for the VCT which have an evergreen strategy.

VCT investments aim to offer:

tax free capital growth
tax free dividends
income tax relief at up to 30%

In order to maintain the tax benefits available from investing in a VCT, an investor must hold their shares for 5 years from the date of issue and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in the VCT losing its status and a withdrawal of the tax reliefs for all investors within their 5-year restricted period (as well as a removal of the tax-free dividend status going forward).

Investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. VCT investments should be considered long-term investments, being at least five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest.

For further details of the investment risks please see the Key Risks section of this website and for further details of the tax advantages please see the Tax Treatment section of this website. Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.

Investment Guide

Venture Capital Trusts (VCTs) are investment companies which typically invest in unquoted trading companies, and are listed on regulated markets such as the London Stock Exchange.