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Investing for tax-free dividends

Tuesday, 05 March 2019 -

No longer the precursor to end-of-tax-year planning.

Venture Capital Trusts (VCTs) provide the opportunity for appropriate investors to support the growth of small UK businesses and receive attractive tax reliefs in return. Introduced in 1995, VCTs enable smaller companies that may find it hard to get traditional finance, such as from banks.

VCTs have historically been used as an end-of-tax-year financial planning tool, but this is no longer the case. They may appeal to investors who are already maximising their annual Individual Savings Account and pension allowances and have further cash to invest. Alternatively, they may be appropriate for investors who have reached the pension lifetime allowance and want to supplement their retirement income strategy by investing in VCTs for tax-free dividends.

         

Portfolio diversification

VCTs may also appeal to higher earners with a total income over £150,000 who are affected by the tapered pension annual allowance and who want to reduce their Income Tax bill, or even investors who want to add some exposure in their portfolios to small, young UK enterprises with growth potential, or diversify their portfolio with exposure to unquoted companies.

         

A VCT is a company whose shares trade on the London stock market. They are high-risk investments that in certain scenarios could work well for individuals, depending on their personal circumstances, but there are very strict rules on how VCTs can invest your pooled money in order to qualify as VCTs.

         

Investments in VCTs carry tax relief to encourage you to invest in these smaller, higher-risk companies. By pooling your investments with those of other customers, they allow you to spread the risk over a number of small companies.

         

VCTs must:

Invest at least 70% in qualifying companies within three years

Invest at least 70% in ordinary shares within three years

Derive their income wholly or mainly from shares or securities

Have no holding in one company representing more than 15% of the portfolio’s overall holding

Quote their ordinary shares on the London Stock Exchange

Retain no more than 15% of their income

       

Qualifying holdings must:

Have gross assets of no more than £15 million before investment

Receive no more than £5 million of VCT investment in any 12-month period

Undertake a qualifying trade which generally excludes property, hotels, nursing homes, dealing in land or commodities, financial or legal services, leasing, etc.

Have no more than 250 full-time employees at the time of investment

         

Subscribing to new shares

Investors can gain access by subscribing to new shares when a trust is launched or by buying shares from other investors when the trust has been established. Investors receive Income Tax relief when they buy newly issued VCTs, currently at the rate of 30% on investments of up to £200,000 per tax year.

         

This relief is provided as a tax credit to set against the investors’ total Income Tax liability and, therefore, cannot exceed their total tax liability for the tax year. VCT tax reliefs apply to people aged 18 years or over who are UK income taxpayers, and are only available if the trust maintains VCT status. The relief received depends on the investors’ own individual circumstances.

         

Investors do not receive this tax relief if they buy existing VCT shares. They have to hold shares in a VCT for at least five years to keep the Income Tax relief – if they have to sell them before then, they’ll lose this benefit. There is also no Capital Gains Tax payable on profits from selling VCT shares, no matter how short a period they are held, provided the company maintains its VCT status.

         

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

         

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

         

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.