This is intended for guidance only and does not attempt comprehensive or detailed coverage of the rules of the Venture Capital Trust (VCT) scheme. The guidance reflects HM Revenue & Customs (HMRC) understanding of the law in force at the time of publication. The statements in the guidance do not affect any right of appeal about any tax liability. More detailed information can be found in the Venture capital schemes manual.
This is a brief account of:
It also provides:
The VCT scheme started on 6 April 1995. It is designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, by investing through Venture Capital Trusts.. So, if you invest in a VCT, you spread the investment risk over a number of companies.
Previously VCTs were companies listed on the London Stock Exchange, but from April 2011 VCTs are companies admitted to trading on a regulated market. A regulated market is one named as such by the EU, covering markets in EU and EEA countries. VCTs are similar to investment trusts. They are run by fund managers who are usually members of larger investment groups. Investors can subscribe for, or buy, shares in a VCT, which invests in trading companies, providing them with funds to help them develop and grow. VCTs realise their investments and make new ones from time to time.
VCTs must be approved by us for the purpose of the scheme. HMRC give their approval if they meet certain conditions. If you invest in them you may be entitled to various Income Tax and Capital Gains Tax reliefs, and VCTs are exempt from Corporation Tax on any gains arising on the disposal of their investments.
HMRC's approval of a VCT means that it currently satisfies their requirements enabling investors to qualify for certain tax reliefs. It does not guarantee the safety or success of any investments you make in a VCT. HMRC strongly advise you to get advice from a professional adviser before you decide whether or not to invest in a VCT.
Tax reliefs are only available to individuals aged 18 years or over and not to trustees, companies or others who invest in VCTs.
You may not have to pay Capital Gains Tax on any gain you make when you
dispose of your VCT shares (This is called disposal relief).
You can get two of the reliefs, dividend relief and Capital Gains Tax exemption, for both newly issued shares and second-hand shares acquired, for example, through the Stock Exchange. But Income Tax relief can be claimed only if you subscribe for new shares.
You can get Income Tax relief for a tax year if shares in VCTs for which you subscribed up to a maximum of £200,000 are issued to you in the year. A tax year begins on 6 April in one year and ends on the following 5 April. You can claim the reliefs, where applicable, from the Tax Office which deals with your tax affairs.
In some cases you will not be entitled to Income Tax relief for a subscription for VCT shares. For example if a loan is made to you or an associate of yours (such as a business partner, your spouse, or a close relative) on terms which are linked to the share subscription.
You can find information about the circumstances in which reliefs can be lost or withdrawn.
You should claim the relief in your tax return for the year in which the shares were issued. However, you do not necessarily need to wait until you send in your tax return to get the benefit of the relief. You can do this once the shares which qualify for the relief have been issued to you by contacting your Tax Office.
If you pay tax under PAYE (Pay As You Earn), and want the relief immediately, you can ask your Tax Office to adjust your tax code.
If you do not pay tax under PAYE, but are due to make Self Assessment payments on account, you can, subject to certain conditions, make a claim to reduce these. To receive the relief this way, please contact your Tax Office and ask them to tell you the qualifying conditions for making a claim to reduce payments on account and explain how to make a claim. When making your claim, you must bear in mind that HMRC will charge you interest or penalties or both if your claim proves to be excessive.
Whether or not you claim relief in either of these ways, you must enter details of your investment on your tax return for the tax year in which your VCT shares were issued. The amount of relief you get cannot exceed your Income Tax liability for that year. For example, if you subscribed £20,000 for shares issued in the tax year 2009-10 your maximum Income Tax relief would be £6,000. However, if your Income Tax liability in that year before any Income Tax relief is obtained in respect of your VCT investment is £5,000 that is the relief you will receive. The difference of £1,000 cannot be set off against the Income Tax liability of any other year.
The VCT will provide you with a certificate when you are issued with qualifying shares. Your tax office may ask you for this certificate when you claim Income Tax relief.
Yes, but to get Income Tax relief you must have subscribed for them in your own name.
Dividend relief that you receive for ordinary shares in VCTs (dividend relief), and Capital Gains Tax exemption on their subsequent disposal, are given only for shares you acquire up to the 'permitted maximum' of £200,000 in the tax year.
Shares acquired earlier in the tax year count first. Ordinary shares of different classes or in different VCTs acquired on the same day are identified on a proportionate basis. It does not matter whether you subscribed for the shares or acquired them by purchase or other means, or whether you also get Income Tax relief for any of those shares.
You can get Income Tax relief only for the first £200,000 worth of 'eligible shares' (see Tax reliefs available for investors) you subscribe for and which are issued to you in the tax year.
This means that the shares you obtain Income Tax relief on, if any, may not be the same as those you receive dividend relief on and which qualify for Capital Gains Tax exemption.
On 1 May 2009, £80,000 worth of eligible shares in a VCT you had subscribed for were issued to you. On 1 June 2009 you bought £100,000 worth of second-hand ordinary shares in a VCT, and £140,000 worth of eligible shares in a VCT you had subscribed for were issued to you. You were over the age of 18 on 1 May 2009.
You get dividend relief and Capital Gains Tax exemption on:
So, £50,000 worth of the second-hand shares, and £70,000 worth of the eligible shares, attract the reliefs.
You can get Income Tax relief for:
There will be no chargeable gain (or allowable loss) for Capital Gains Tax purposes on selling ordinary shares in a VCT provided:
Because the ordinary shares of a VCT are listed in the Official List of the London Stock Exchange, you can sell them in the same way as any other listed investment.
To get the tax reliefs offered by the VCT scheme, you must invest in a company which has been approved as a VCT. The main conditions a company must satisfy for HMRC to approve it as a VCT are that:
To retain approval, the company must continue to satisfy all the conditions during each later accounting period. The consequences for an investor of the withdrawal of approval are explained in the attached link Withdrawal of a company's approval as a VCT.
HMRC can provisionally approve a company which has not yet met the conditions but satisfies them that it intends to meet them within the time allowed. In such cases, the 70 per cent (or 30 and 70 per cent) conditions must be met for an accounting period beginning not more than three years after the date of provisional approval and must continue to be met for subsequent accounting periods. The other conditions must be met for the current or next accounting period and must continue to be met for subsequent accounting periods.
HMRC will withdraw provisional approval if the company fails to meet the conditions within the specified periods.
If a VCT makes more than one issue of shares HMRC can temporarily disregard the money raised by the second and subsequent issues when we determine whether the 70 per cent (or 30 and 70 per cent) conditions for approval are satisfied.
The money raised by an issue of shares must, however, be taken into account for the purposes of determining whether these conditions are satisfied for an accounting period ending within three years after the shares in question were issued and for all subsequent accounting periods.
The tax reliefs you get by investing in a VCT can be lost or withdrawn in certain circumstances. A deferred gain can be revived and you can lose your Income Tax relief if you dispose of your VCT shares. Shares will no longer attract any of the tax reliefs offered by the scheme if the company loses its VCT approval. There is more detail below.
If something happens which means that you lose your entitlement to Income Tax relief, you must tell your Tax Office within 60 days of coming to know of it.
If you subscribed for shares in a VCT prior to 6 April 2004 you could defer a gain against those shares. If you sell or otherwise dispose of your VCT shares at any time, except where you transfer the shares to your spouse while living together as husband and wife (a 'transfer between spouses'), any gain you have deferred in respect of the shares will be revived in the tax year that you dispose of the VCT shares. If there has been a transfer between spouses, then we will treat your spouse for deferral relief purposes as though he or she had subscribed for the shares in the first place.
This means that, for example, if your spouse then disposes of the shares (other than via another transfer between spouses) he or she will be liable for any gain.
You can use your annual exempt amount for the tax year the deferred gain is revived in to cover all or part of the revived gain. Or, you can defer the revived gain by setting it against a further qualifying investment under the Enterprise Investment Scheme (EIS). The revived gain may be eligible for taper relief. The amount of taper relief will be based on the qualifying period up to the disposal of the asset that gave rise to the original gain.
If you sell or otherwise dispose of your shares within five years of them being issued to you, you will have to repay some or all of the Income Tax relief you get for the shares you dispose of. This does not apply if the disposal is a transfer between spouses.
If there has been a transfer between spouses of shares for which Income Tax relief was obtained, the recipient is treated in relation to any subsequent disposal or other event as though he or she had subscribed for the shares in the first place. This means that, for example, if the spouse to whom the shares were transferred disposes of them within five years after they were issued, other than via another transfer between spouses, we will withdraw the Income Tax relief from the person who makes the disposal.
If you dispose of shares by way of 'a bargain made at arm's length' (a normal commercial transaction between unconnected persons), the amount of Income Tax relief HMRC will withdraw is the smaller of
If the disposal is other than a bargain made at arm's length HMRC will withdraw all the relief you got for the shares you disposed of.
You subscribed £100,000 for 100,000 eligible shares (see Tax Reliefs available for investors) in a VCT which were issued to you in the tax year 2010-11. You got Income Tax relief of £100,000 × 30% = £30,000. In the tax year 2012-13 you sell 40,000 of the shares for £34,000 by way of a bargain at arm's length.
The amount of Income Tax relief we withdraw is the smaller of:
HMRC will withdraw £10,200 relief.
If you had sold the 40,000 shares for £45,000 by way of a bargain at arm's length, the amount of Income Tax relief withdrawn would have been the smaller of
So, HMRC would have withdrawn £12,000 relief.
In such cases, a proportion of the deferred gain will be revived. The amount will depend on the proportion of your investment that attracted deferral relief originally and the extent if any to which the deferred gain has already been revived.
The gain can be revived in certain other circumstances, for example:
The deferred gain will not be revived if you cease to be resident or ordinarily resident in the UK because you work outside the UK and you become resident or ordinarily resident in the UK again within three years without having disposed of any of the shares in the meantime.
If you hold shares for which you have got Income Tax relief or deferral relief, and you die, we will not withdraw that tax relief, or revive the deferred gain, on account of any event occurring at or after the time of death.
If HMRC withdraw a company's provisional approval (see section Conditions for HMRC approval of VCTs) as a VCT, HMRC will treat its investors as if they had never been entitled to any of the reliefs they got for their shares in the company. This means that:
If HMRC withdraw a company's full approval (see section Conditions for HMRC approval of VCTs) as a VCT within five years of issuing shares then:
If HMRC withdraw a company’s full approval as a VCT more than five years after issuing shares, the consequences for the various tax reliefs you got in respect of those shares are the same, except that HMRC will not withdraw any Income Tax relief on account of the withdrawal of approval.
If a company issues any of its shares or securities to a VCT, it must meet certain conditions if those shares or securities are to form part of the VCT's qualifying holdings (see Conditions for HMRC approval of VCTs). These conditions concern both the type of company and the size and mix of investment. There are, for example, requirements as to the company's:
The company must be unquoted for VCT purposes. This means that none of its shares, stocks, debentures or other securities can be listed on a recognised stock exchange.
Companies whose shares etc are dealt in solely on the Alternative Investment Market (AIM) of the London Stock Exchange or on two of the Plus Markets are unquoted companies. Those trading on Plus Traded and Plus Quoted will be regarded as unquoted, those trading on Plus Listed will not, as this was designated a recognised stock exchange in July 2007. Shares or securities in a company which ceases to be unquoted can continue to be treated as being comprised in the VCT's qualifying holdings for the following five years.
The company must exist for the purpose of carrying on a 'qualifying trade' or be the parent company of a trading group whose business as a whole meets the scheme's rules. The relevant company (in this instance the one receiving funds from the VCT) must have a permanent establishment in the UK.
Most trades qualify, provided that they are conducted on a commercial basis with a view to making profits. A trade will not qualify if one or more excluded activities together make up a 'substantial part' of that trade. This will depend on the relevant facts and circumstances, but we generally consider that they do where they amount to more than 20 per cent of the trade. The main excluded activities are:
For investments made by the VCT on or after 6 April 2012, the value of the company's gross assets must not exceed:
If the company is a member of a group, the limits apply to the gross assets of the group, taken as a whole. This is known as the 'gross assets' rule and our interpretation of it is given in Statement of Practice SP2/06 (see Further Information).
The company must not be controlled by:
Nor must there be any arrangements for such control. For this purpose a company controls another company if it directly or indirectly possesses, or is entitled to acquire:
For this purpose all loans (except loans convertible into shares) and fixed-rate preference shares that do not carry voting rights are ignored.
A company in which a VCT invests may have subsidiaries providing that they meet certain conditions, which are outlined below.
In the case of each subsidiary, the company invested in must directly or indirectly own more than 50 per cent of the ordinary share capital of the subsidiary and the subsidiary must not be controlled by any person other than the company invested in or another of its subsidiaries. Additionally, any subsidiary whose business consists wholly or mainly of holding or managing land or property deriving its value from land must be at least 90 per cent owned directly by the company invested in. If the money invested in the company by the VCT is to be used by a subsidiary, then that subsidiary must be at least 90 per cent owned directly by the company invested in. The trading activity for which the money was raised may be transferred between such subsidiaries and the company invested in.
Other rules concerning the investment include rules relating to:
The tax affairs of companies that a VCT has a qualifying holding in are dealt with by our Small Company Enterprise Centre (SCEC) (contact details are in Further Information).
A company intending to accept an investment from a VCT can contact the SCEC to seek an assurance that the investment will be a qualifying holding. The company will need to provide all relevant information, including:
The Inspector at the SCEC will provide written confirmation they are satisfied, on the basis of the information provided, that the conditions of the VCT scheme which apply to the company and the shares will be met.
If an investment is made in a company without that company getting an advance assurance, then it can still ask the SCEC at a later date to say whether the VCTs holding in it is a qualifying holding.
You can get information about the venture capital industry and particular VCTs from the website of the British Venture Capital Association (BVCA) or on Tel 020 7025 2950.
The Association of Investment Companies (AIC) represents many VCT fund managers and further information can be found on their website or on Tel 020 7282 5555.
The provisions for VCTs are in sections 274 to 285 ITA2007 and the provisions for companies invested in by a VCT are in sections 286 to 313 ITA2007:
Statutory Instrument 1979 of 1995 deals with general VCT regulations including breaches.
Statutory Instrument 2199 of 2004 deals with VCTs Winding Up and Mergers.
Four Statements of Practice currently apply to the VCT scheme, they are:
Statements of Practice are contained in the booklet Statements of Practice (PDF 1.4MB).
You can get Helpsheet IR 298 Venture Capital Trusts and Capital Gains Tax by calling the Orderline on Tel 0845 9000 404 or see the latest version of the Helpsheet HS298 (PDF 159K).
HMRC Small Company Enterprise Centre (SCEC) is responsible for approving companies as VCTs. For this purpose SCEC will normally want to see copies of the company's:
The notice of approval will specify the date from which approval is given and the date from which approval takes effect.
VCTs are expected to keep to the business plan agreed with SCEC, and to make further reports to SCEC on a regular basis.
For enquiries about approval of a VCT and application for such approval, contact HMRC (Capital Taxes) by writing to:Small Company Enterprise Centre