Venture capital trusts

• You may qualify for 30% income tax relief when you purchase new VCT shares, subject to an annual investment limit of £200,000 and a minimum holding period of five years. However, you cannot claim more income tax relief than the total amount of income tax that you have paid in the year in which you buy the shares.
• Potentially you won't pay income tax on dividends received in respect of ordinary shares bought within the 'permitted maximum' investment of £200,000.
• Potentially you won't pay capital gains tax if you sell shares bought within the ‘permitted maximum’ investment of £200,000.
• You can claim the tax relief upfront, without having to wait until you fill in your tax return unless you are self employed.

• Withdrawal of tax breaks – if certain criteria are not met, for example, if the investment is not held for five years or if the VCT does not invest 70% of its funds in qualifying investments, the tax breaks will be withdrawn and you may be required to repay any tax relief which you have received upfront. No VCT can guarantee that its investors will qualify for tax relief. You should not invest in a VCT simply for the tax benefits.
• A limited secondary market for shares – this may make them hard to sell. To partially address this issue, some VCT managers offer a Buy Back facility, normally at a discount to the net asset value. You may not be able to sell your investment easily and you may face heavy financial penalties for selling them early.
• Type of company the VCT invests in – VCTs are designed to provide capital for small companies and each VCT will invest in a number of companies. There is a risk that these companies may not perform as hoped and in some circumstances may fail completely. Changes to the law in 2006 required VCTs to invest in smaller and potentially riskier companies than was formerly the case. VCTs support small and unquoted companies, and their investments are inherently high risk.
• Where the 30% non-qualifying investments are invested – typically, VCTs have invested the 30% non-qualifying investments in money market securities/gilts/cash deposits etc. Some, however, invest part of this in more risky investment vehicles which may raise the overall risk profile of the fund still further.
• Charges – charges for VCTs may be greater and less transparent than for other investments. You may also be charged performance fees.
• Security of capital – as with any asset-backed investment, the value of a VCT depends on the performance of the underlying assets, so you may get back less than you originally invested, even taking into account the tax breaks.