VCT Tax Relief
How to get money back from the tax man
In order to encourage investors to support small, dynamic businesses in the UK the Government offers VCTs some very generous tax reliefs (subject to certain conditions, see below for details):
An up-front lump sum rebate
On-going reliefs
Up Front 30% Income Tax Relief:
Even if you are a basic rate tax payer, you will receive 30% of your initial investment back from the Inland Revenue, subject to the following conditions:
The maximum investment in any one tax year is £200,000
Investors can only reclaim the level of income tax they are due to pay
VCT shares must be held for 5 years, otherwise the Inland Revenue can claim its rebate back
Example: an investor with taxable income of £50,000 invests £10,000 in a VCT:
| Gross Investment |
£10,000 |
|---|---|
| Income Tax Relief @ 30% |
£3,000 |
| Net Cash Cost of Investment |
£7,000 |
Please note that investors cannot claim back more than their tax liability. Therefore, if the investor in the above example had an income tax liability of £2,000 they would not get a further £1,000 back from their £10,000 VCT investment. Up front income tax relief only applies on subscription for new VCT shares. If shares are sold within 5 years of being held, the investor will be liable for any income tax relief received and will have to pay it retrospectively. VCTs should therefore not be considered as a short term investment.
On-Going Reliefs:
1. Tax Free Dividends
All dividends distributed by a VCT are free of income tax. VCTs pay no corporation tax or capital gains tax on realised investment gains and can distribute them following each realisation. These capital profits will be paid as tax-free dividends to shareholders. VCTs are not obliged to adhere to a policy of distributing realised capital profits, and investors should take note of the existence, or absence, of any such commitment in the prospectus.
2. No Capital Gains Tax
Any profit from the sale of VCT shares is not subject to capital gains tax however any loss of value is not an allowable loss.
Who Qualifies for VCT Tax Relief?
Investors must be UK taxpayers aged 18 or over investing in the primary VCT market. If shares in a VCT are bought through a stockbroker on the London Stock Exchange (i.e. not in the initial offer period), the initial 30% income tax relief will not apply. However, the investor will still receive tax-free distributions and will not pay capital gains tax when selling the VCT shares.
Tax Risks
There may be a possibility of a VCT losing its tax-free status if it fails to meet any of the qualifying requirements. Should the fund lose its VCT status, you may be required to retrospectively repay the income tax relief you obtained. Furthermore, any future dividends and the disposal of your shares would become subject to tax.
You would also have to retrospectively repay your tax relief if you sold your shares having held them for less than 5 years. As such, VCTs must be seen as a medium to long term investment.
All tax rules are subject to statutory change and if you are in any doubt about the tax implications of an investment, we recommend that you seek specialist tax advice.
Further Information
Telephone - 020 3206 7222
Email - vcts@matrixgroup.co.uk