At the end of last year, I introduced the possibility of including a venture capital trust in a non-pension retirement-planning portfolio. If last tax year-end’s VCT activity is anything to go by (especially in relation to planned exit schemes), we will see a further increase in VCT activity towards the end of this tax year.
Anecdotally at least, it seems some of that activity was fuelled by the anti-forestalling provisions limiting the tax relief on some pension contributions by (and the imposition of a special annual allowance charge on inputs and accruals for) high earners. This looks set to continue when all tax relief is removed on contributions over the available annual allowance – taking account of carried-forward relief. This could be especially so in the light of the now known attack on employer-financed retirement benefit schemes and some other trust-based employer-sponsored arrangements.
With all this in mind, let’s have a reminder of the fundamentals of the VCT. A VCT is a quoted company that invests in a portfolio of unquoted and Aim-traded shares and can provide, within limits, income tax relief on investment at up to 30 per cent and tax-free income and tax-free capital gains (also within limits). In addition, the VCT is itself taxed favourably.
The 30 per cent rate of income tax relief was introduced in April 2006 – it was 40 per cent for the previous two years. The annual subscription amount that qualifies for income tax relief is £200,000 (for 2010/11).
So, basics done, let’s do the detail, so to speak.
A VCT is a quoted company, similar to an investment trust. It is, in effect, a pooled investment that is professionally managed.
A company has to be approved by HM Revenue & Customs as a VCT company and the main conditions for approval are as follows:
- A company (or group of companies) raising money under a VCT must have fewer than 50 full-time employees at the date on which the relevant shares or securities are issued.
- At least 70 per cent by value of the company’s investments must be in qualifying shares and securities (qualifying holdings).
- At least 30 per cent by value of its qualifying holdings must be in ordinary shares and at least 10 per cent of its holding in each company must be in ordinary non-preferential shares.
- The company’s income must be derived wholly or mainly from shares or securities.
- The company must not hold shares in one company that represents more than 15 per cent of its investments.
- The company’s ordinary shares must be quoted on the London Stock Exchange and the company must not retain more than 15 per cent of the income it derives from shares or securities.
A qualifying holding is basically a holding of shares or securities that was first issued to the VCT by a company which satisfies the following conditions:
- It must be unquoted, whether it is resident in the UK or abroad. For this purpose a company whose shares are listed on Aim and Ofex are treated as being unquoted.
- It must be carrying on a qualifying trade (see below) wholly or mainly in the UK.
- It must exist wholly for the purpose of carrying on one or more qualifying trades. A trade will qualify provided it is conducted on a commercial basis with a view to making profits, unless a substantial part of the trade consists of one or more of the following activities:
– dealing in land, commodities or futures, or in shares, securities or other financial instruments;
– dealing in goods otherwise than in an ordinary trade of wholesale or retail distribution;
– banking, insurance or any other financial activities;
– leasing or letting or receiving royalties or licence fees;
– providing legal or accountancy services;
– property development;
– farming or market gardening;
– forestry and timber production;
– operating or managing hotels or guest houses;
– operating or managing nursing or residential care homes;
– producing coal; or
– producing steel.
HMRC regards 20 per cent or more of turnover as being “substantial” for this purpose.
- The gross assets of a company in which an investment is being made must not exceed £7m prior to the investment and £8m immediately after the investment.
- The reliefs are unavailable if certain guarantee arrangements exist before or when the shares are issued.