What are the tax benefits?

It is in the government's interest to encourage investment in these young firms. Some of the acorns of today will be the oak trees of tomorrow but, like acorns, a number will fail and investors lose their money. A great way to encourage investment is to offer investors tax breaks. However we believe it is important to invest for investment reasons alone, and treat the tax benefits as a bonus; they should not be the primary reason to invest.

Up to 30% of your initial investment back

If you are a tax payer you will receive a tax rebate of up to 30% when investing in a VCT. For example if you invest £10,000 you could either receive a cheque from the taxman for £3,000 or an adjustment in the tax you pay. Anyone can invest but note that this is a tax rebate and is restricted to the amount of income tax you pay (Tax deducted at source on dividends is not eligible). You can invest up to £200,000 each tax year but if you have only paid £5,000 in income tax you would only receive a £5,000 tax rebate. You must also hold onto the shares for five years to keep the tax rebate permanently. This rebate is only available when you invest in a new issue of shares in a VCT or a top-up.

Capital gains tax

When you eventually dispose of a VCT any gain will be completely exempt from capital gains tax. By buying shares in an existing VCT which is quoted on the stock market you do become eligible for the capital gains tax exemptions and you do benefit from tax free dividends as they are paid out. However it must be noted that to obtain the 30% tax relief against income tax this is only available if you buy shares in a VCT on launch.

To summarise - if you buy a VCT at launch you receive:-

• A 30% tax rebate (subject to your total income tax bill)
• Tax free distributions and dividends
• No capital gains tax on any capital profit on sale

Example A

Mr A decides to invest £200,000 in a VCT. In the 2006/2007 tax year he anticipates that he will pay £90,000 in income tax.

Example B

Mrs B decides to invest £10,000 after 6th April 2006, she earns £30,000 per year, so is a basic rate tax payer, and will pay approximately £5,000 in income tax. (Please note Mrs B has a significant portfolio and this represents less than 10% in total.)

Example C

Mrs C wants to invest £100,000. She earns £60,000 per year and is a higher rate tax payer. She has calculated that she will pay £16,200 in income tax in the tax year 2006/2007.

In the final example Mrs C has not paid enough income tax to reclaim the full 30% relief therefore she is entitled to only £16,200 which is the tax she will pay.

All tax treatments are subject to change and so can be varied. The exact value will depend on your circumstances. But you have to hold your investment for at least five years to take advantage of the tax breaks. If the VCT Manager fails to meet the investment rules, such as investing 70% within three years, the tax benefits could be withdrawn retrospectively.

How do I claim tax relief?

HMRC make this easy. When you complete your tax return, there is a special VCT section for completion whereby you will then be repaid the income tax by the HMRC via your tax code, as a lump sum rebate or if self-employed a reduction in Schedule D tax.