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Learn more and compare subscriptions content expands above. Venture Capital Trusts explained. What do VCTs invest in? Small businesses need investment to grow — potentially giving investors a high return but with more risk.
VCT tax rules and relief VCTs offer several tax benefits to encourage investment into higher-risk companies. Previous Latest VCT launches. Next What are the risks of VCTs? This guide gives you more details about VCTs and how to invest in them.
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Please tick the box if you would like to stay informed via post. Please tick the box if you would like to stay informed via phone. Get in touch Please use this form to get in touch with our experts if you have any questions or would like more information. Search this site. Relief is also available in the case of joint subscriptions.
Where shares are held jointly each of the owners is treated as having subscribed an equal amount even if all of the funds were provided by one of them. There is a 'carry back' facility, which allows all or part of the cost of shares acquired in one tax year to be treated as if acquired in the preceding tax year, with relief then given against the income tax liability of that preceding year.
Secondly, by employment — a partner, director except for business angels or an employee is deemed connected an associate is so connected. He is then deemed connected and his relief will be withdrawn. Prior to claiming relief, an investor must receive from the company form EIS3, which certifies that the company has not, so far, breached any of the conditions for being a qualifying company.
Form EIS3 cannot be issued unless the company has been trading for at least four months. Income tax relief is then typically claimed on the self-assessment tax return for the tax year in which the shares were issued.
EIS shares must be held for three years from the date of issue or the start of trade if later, otherwise income tax relief will be withdrawn. If an investor has received income tax relief which has not subsequently been withdrawn on the cost of the shares, and the shares are disposed of after they have been held for the three-year period, any gain is exempt from capital gains tax SA TCGA The exemption may be restricted if:. There is no restriction if the only reason full income tax relief cannot be given is because the claim reduces the investor's income tax liability to nil.
If income tax relief is not claimed, then any subsequent disposal of the shares will not qualify for exemption from capital gains.
An investor can claim a capital loss on the disposal of EIS shares whenever disposed of but in calculating this loss, the allowable cost is reduced by income tax relief not withdrawn. If the shares are disposed of at a loss, the investor can elect that the amount of the loss, less any income tax relief not withdrawn, can be set against income of the year in which the shares were disposed of, or any income of the previous year, instead of being set off against any capital gains S ITA Deferral relief can be claimed against any amount of chargeable gain arising on the disposal of any asset where the gain is invested in EIS shares.
It can also be claimed when a gain previously deferred under the EIS or VCT shares issued before 6 April , is brought back into charge. The investor can claim deferral relief on only part of the gain if desired. The effect is to defer the tax liability until the EIS shares are sold or deemed sold. The investment must be made within the period one year before or three years after the gain arose. To qualify, the investor must be an individual or the trustees of a qualifying settlement who is resident in the UK both at the time the gain accrued and at the time the shares are issued.
The relief is claimed by the investor submitting part 2 of the EIS3 certificate from the company. The time limit for claiming is five years from 31 January following the end of the tax year in which the shares were issued.
A disposal of some of the shares would trigger a proportion of the deferred gain becoming assessable. It is therefore possible for an individual to invest in a company which he already owns or controls. For investors to be able to claim, and keep tax reliefs, the issuing company has to meet the qualifying rules as referred to in the introduction throughout the three-year period. Note however that the company may subsequently become quoted without investors losing relief, but only if there were no arrangements for it to become quoted in existence when the shares were issued.
Tax reliefs are only available to individuals aged 18 years or over and not to trustees, companies or others who invest in VCTs. CGT deferral relief, previously available, was abolished in respect of shares issued after 5 April In the budget, the government announced an amendment to the VCT legislation to ensure that from 6 April , notwithstanding the general time limits for making assessments to recover tax, HMRC can withdraw tax relief if VCT shares are disposed of within five years of acquisition.
A further announcement in the budget was that the government were to prevent VCTs from returning capital that does not relate to profits on investments within three years of the end of the accounting period in which shares were issued to investors. This took effect in respect of shares issued on or after 6 April The annual limit applies to all the taxpayer's acquisitions in VCTs in the tax year concerned, and shares acquired earlier in the tax year count towards the permitted maximum first.
The shares must be held for at least five years and throughout this time carry no present or future preferential rights to dividends or to the VCT's assets on winding up and no present or future rights to be redeemed.
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