Why invest in a Downing VCT?
Income tax relief
You can claim 30% income tax relief on your VCT contribution.
4% annual target
No capital gains tax on profits.
Share buy back option
Subject to VCT regulations, market conditions and liquidity.
Your capital is at risk and you may not get back the full amount you invested. VCT investments are long term and high risk. Tax reliefs are subject to change and depend on personal circumstances. Please read full details of the risks here.
What is a VCT?
VCTs give you the opportunity to invest in a tax-efficient way in the growth of small UK companies that are not quoted on a main stock exchange. Although, being quoted on the Alternative Investment Market (AIM) is acceptable.
VCTs are government-backed and are listed on the London Stock Exchange. They were introduced in 1995 to encourage investment in entrepreneurial businesses to help them prosper and, in turn, boost the UK economy.
You can claim tax reliefs provided you hold your VCT shares for at least five years.
Now an established part of the investment landscape, £731 million was invested in VCTs in the 2018/19 tax year (source: Association of Investment Companies).
What are the benefits of investing in a VCT?
Investing in a VCT allows you to claim a host of tax reliefs and at the same time broaden your investment portfolio.
Claiming 30% income tax relief on your VCT contribution is particularly useful if you’ve paid the annual maximum into your pension plan.
You could use a tax-free annual dividend from a VCT to build an income stream that adds to your retirement income or meets other financial needs. This can be beneficial if your pension pot has reached, or is close to reaching, the maximum lifetime allowance limit.
VCTs support smaller companies that may find it hard to get finance from traditional sources, such as banks. Backing these businesses can help create jobs and make a positive contribution to the development of the UK's economy.
Downing ONE VCT targets a tax-free return of 4% p.a. based on the net asset value (NAV) of the portfolio - although this cannot be guaranteed.
Both VCTs offer exit opportunities, which means you can sell your shares back to the VCT. This is subject to applicable regulations, market conditions and the VCT having available reserves.
What are the key risks of investing in a VCT?
Investing in VCTs is for the long term, high risk and not suitable for everyone. We recommend that you seek financial advice and be comfortable with taking on the following risks before you put money into a VCT.
The value of your investment and any income from it can go down as well as up - so you might lose money. Also, the share price of a VCT may be more volatile compared to other companies quoted on a main stock exchange. And you cannot rely on the past performance of a VCT to judge how successful it will be in the future.
Investing in a VCT allows you to access various tax reliefs. However, these depend on personal circumstances and may change in the future. Moreover, if a company that a VCT invests in loses its qualifying status then your tax reliefs are likely to be affected.
Please note this is only a brief overview of the risks involved with investing in a VCT. Please read full details of all the risks here before investing.
What are the types of VCTs?
There are three types of VCTs:
Generalist VCTs invest in a range of unquoted companies (although being quoted on AIM is acceptable) across a number of sectors and at different stages of development.
Specialist VCTs invest in a range of unquoted companies (although being quoted on AIM is acceptable) in a specific industry, such as healthcare or technology.
AIM VCTs invest in companies that are listed, or are about to be listed, on the Alternative Investment Market.
Some VCTs are a hybrid of the different types.
Note, most VCTs are 'evergreen', meaning they have no fixed wind up date, whereas some VCTs are 'limited life' and seek to wind up at a fixed date following the minimum five year holding period for tax relief.
How do VCTs work?
The money you invest in a VCT is pooled together with the funds of other investors and distributed across a number of companies. When you invest in a VCT you become a shareholder of the VCT itself, not of the individual companies that it invests in.
VCTs must adhere to a strict set of rules laid down by HMRC:
- At least 30% of VCT funds must be invested in 'qualifying holdings', i.e. companies that are not listed on a main stock exchange and undertake a qualifying trade, within 12 months of the end of the accounting period in which the funds were raised. At least 80% of VCT funds must be invested within three years.
- Up to 20% of a VCT's funds can be invested in 'non-qualifying holdings', such as cash or investment trusts, for liquidity purposes.
- At least 10% of a VCT’s investment in a single company must be in ‘eligible shares’ (shares that don't have any preferential rights) and at least 70% of the VCT's overall investment portfolio must be in ‘eligible shares’.
Depending on the performance of the underlying companies, VCTs pay tax-free income in the form of dividends.
When you come out of a VCT by selling your shares, you'll receive your share of the value of the company, including any tax-free capital growth on your initial investment.
How does a company qualify for VCT investment?
To be eligible to be a qualifying investment for a VCT, a company must satisfy a set of requirements laid down by HMRC.
The company seeking investment must:
- Have a permanent base in the UK.
- Not be quoted on a recognised stock exchange (although being quoted on AIM is acceptable).
- Generally be less than seven years old.
- Have fewer than 250 employees.
- Have a maximum gross asset value of £15 million at the time of investing (£16 million after investment).
- Not receive more than £5 million from VCT, EIS or other ‘state aid’ sources in any 12-month period.
- Issue new shares to the VCT (secondary shares don't count as a VCT qualifying investment).
- Not be controlled by another company.
Note that some of these rules are slightly different for 'knowledge intensive' companies.