Venture Capital Trust
Encyclopedia
A venture capital trust or VCT is a highly tax efficient UK closed-end
Closed-end fund
A closed-end fund is a collective investment scheme with a limited number of shares. It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates.Typically an...

 collective investment scheme
Collective investment scheme
A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...

 designed to provide private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

 capital for small expanding companies and capital gains for investors. VCTs are a form of publicly traded private equity
Publicly traded private equity
Publicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.There are fundamentally two separate opportunities that private equity firms...

, comparable to business development companies
Business Development Company
A Business Development Company is a form of publicly traded private equity in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940...

 in the United States.

VCTs are companies listed on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...

, which invest in other companies which are not themselves listed. First introduced by the Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...

 government in the Finance Act
Finance Act
In the UK, the Chancellor of the Exchequer delivers an annual Budget speech on Budget Day, outlining changes in spending, as well as tax and duty. The changes to tax and duty are passed as law, and each year form the respective Finance Act...

, 1995  to encourage investment into new UK businesses, they have proved to be much less risky than originally anticipated.

Tax reliefs

Tax reliefs are different for investors in new shares issued by VCTs and investors who purchase second-hand shares, for example on the stock market.

For second-hand shares, the reliefs are
  • exemption from income tax on dividends on ordinary shares in VCTs
  • exemption from capital gains tax on disposal of shares in VCTs


For new shares, the same reliefs are available, and in addition
  • income tax relief at the rate of 30% on the amount subscribed for the shares (on or after 6 April 2006). This relief is available on investments up to £200,000 in a tax year (£100,000 before 6 April 2006), if they are held for at least 5 years (3 years for shares issued before 6 April 2006).
  • for shares issued before 6 April 2004, capital gains tax deferral (that is, tax on the gains on the disposal of other assets within 12 months before or after the investment could be postponed until the VCT shares were disposed of)


Compared with the issue price of new shares in VCTs, the price of VCT shares on the stock market (second-hand shares) tends to be lower, reflecting the absence of income tax relief.

Criteria

The managers of the VCT have three years in which to choose companies to invest in and during this time often place the money into cash, gilts or bonds. As they become more sophisticated VCTs are investing in funds such as smaller company funds or funds of hedge funds, to maximise returns.

Within three years of the share issue at least 70% of the VCT's assets must be invested in 'qualifying' holdings. These are defined as holdings of shares or securities, including loans of at least five years duration, in unquoted companies and those whose shares are traded on the alternative investment market (AIM). These companies must carry out a qualifying trade wholly or mainly in the UK. The balance of 30% can be invested into areas such as government securities, gilts or blue-chip shares.

VCTs may invest up to £1m in a qualifying company but each individual investment cannot make up more than 15% of VCT assets. The gross assets of the company into which the VCT invests must not exceed £7m or £8m following the investment. If an investment is held in a company that becomes quoted on the London Stock Exchange then it can continue to be treated as a qualifying VCT investment for up to five years.

Types of VCT

VCTs can usually be separated into three different types: Limited Life, Specialist and Generalist. An example of a provider who manages Generalist VCTs would be Albion Ventures
Albion Ventures
Albion Ventures LLP is a UK based venture capital investor which has been managing investments since 1996. The company manages nine Venture Capital Trusts , with approximately £230million under management...

.

Typically VCTs aim to invest the majority of assets in qualifying companies, 80% of which are established companies or management buyouts.

See also

  • Publicly traded private equity
    Publicly traded private equity
    Publicly traded private equity refers to an investment firm or investment vehicle, which makes investments conforming to one of the various private equity strategies, and is listed on a public stock exchange.There are fundamentally two separate opportunities that private equity firms...

  • Business development company
    Business Development Company
    A Business Development Company is a form of publicly traded private equity in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940...

  • Investment trust
    Investment trust
    An Investment trust is a form of collective investment found mostly in the United Kingdom. Investment trusts are closed-end funds and are constituted as public limited companies....

  • Collective investment scheme
    Collective investment scheme
    A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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