The VCT scheme spreads the investment risk over a number of companies since individuals invest indirectly in a range of small companies. Investors subscribe for shares in VCTs which are companies listed on the London Stock Exchange and are similar to investment trusts. VCTs are run by fund managers who are usually members of larger investment groups. From time to time, VCTs realise investments and make new ones. Individuals may now subscribe for shares in a VCT via a nominee.
Tax reliefs are only available to individuals aged 18 years or over and not to trustees, companies or others who invest in VCTs.
For individuals who subscribe for new ordinary VCT shares, three tax reliefs are available.
- ‘front-end’ income tax relief.
- exemption from cgt on disposals.
- exemption from income tax on dividends.
For individuals who do not subscribe but acquire by other means (eg purchase from someone else) then tax reliefs 2. and 3. are available.
CGT deferral relief, previously available, was abolished in respect of shares issued after 5 April 2004.
The government announced at Budget 2014 an amendment to the VCT legislation to ensure that from 6 April 2014, notwithstanding the general time limits for making assessments to recover tax, HMRC can withdraw tax relief if VCT shares are disposed of within 5 years of acquisition.
A further announcement at Budget 2014 was that the government were to prevent VCTs from returning capital that does not relate to profits on investments within 3 years of the end of the accounting period in which shares were issued to investors. This took effect in respect of shares issued on or after 6 April 2014.
Income tax relief is covered in Part 6 of ITA 2007.
‘Front-end’ tax relief is available at 30% of the cost of new ordinary shares subscribed for up to the ‘permitted maximum’ of £200,000 to be set against the individual’s income tax liability for the year of assessment in which the shares are issued. The annual limit applies to all the taxpayer’s acquisitions in VCTs in the tax year concerned, and shares acquired earlier in the tax year count towards the permitted maximum first.
The maximum tax reduction in an individual’s income tax liability in any one year is therefore £60,000 providing a sufficient income tax liability exists to cover it.
If Jonny subscribed £20,000 for shares his maximum income tax relief would be £6,000. If his actual liability in that year before any VCT tax relief is £5,000, then that is the relief he will receive. The difference of £1,000 cannot be set off against the income tax liability of any other year.
The shares must be held for at least five years and throughout this time carry no present or future preferential rights to dividends or to the VCT’s assets on winding up and no present or future rights to be redeemed.
Tax relief can be claimed either with the tax return (see page Ai 2) or as a stand alone claim. There is no set form for a stand alone claim.
Dividends received from VCT shares are exempt from income tax (‘dividend relief’) in respect of shares acquired within the ‘permitted maximum’ of £200,000. These dividends do not have to be included in the tax return.
‘Front-end’ income tax relief will be withdrawn, in whole or in part, if the shares are disposed of within five years of issue. A disposal between spouses or civil partners who are living together does not give a rise to a withdrawal.
Ed subscribes £100,000 for 100,000 VCT shares. He claims ‘front-end’ income tax relief of £100,000 x 30% = £30,000. Within five years he sells 10,000 shares at arms length for £2,000.
a. relief given on shares disposed of £30,000 x 10,000 / 100,000 = £3,000, and
The relief to be withdrawn is therefore £600.
‘Front-end’ relief may also be withdrawn where a VCT loses its approval. Death does not give rise to a withdrawal of ‘front-end’ income tax relief.
|Tax free capital gains||Yes|
|Rate of income tax relief on subscription||30%|
|Maximum investment eligible for income tax relief||£200,000|
|Minimum time investor must hold VCT to qualify for income tax relief||5 years|
|Tax free dividends||Yes|
Investors are now prevented in certain circumstances from refreshing income tax relief on investments into VCTs by disposing of VCT shares and reinvesting the proceeds in new shares. Relief is restricted where there is a “linked sale”.
A sale is “linked” if an individual has sold shares in the same VCT as the VCT in which the investor has subscribed for shares, or in a VCT which is treated as a successor or predecessor of that VCT, and either the subscription for shares is in any way conditionally linked with the share sale, or the subscription and sale are within 6 months of each other.
The amount subscribed on which income tax relief may be claimed will be reduced by the amount of consideration the investor receives for a sale of shares “linked” to the subscription.
A sale is linked where the individual sold shares in the same VCT as the VCT subscribed, or in a “successor” or “predecessor” VCT, and either the subscription is in any way conditionally linked, or the subscription and sale are within 6 months of each other. “Successor” and “predecessor” VCTs are defined in new section 264A(7) ITA 2007.
The measure does not affect subscriptions for shares where the monies being subscribed represent dividends which the investor has elected to reinvest.
The restrictions affect claims to relief for investment in VCT shares, by reference to shares issued on or after 6 April 2014.
There will be no chargeable gain (or allowable loss) for cgt purposes on selling ordinary shares in a VCT provided
- the shares were acquired within the permitted maximum for the tax year in question.
- the VCT was a approved as a VCT both when the shares were acquired and when they were sold.
There is no minimum period for which the shares must be held.
As for ‘dividend relief’, cgt relief is available for both newly issued shares and second-hand shares.
The conditions a company must satisfy for it to be approved as a VCT include the following
- income is wholly or mainly from shares or securities
- at least 70 per cent, by value, of its investments comprise holdings in qualifying companies (see introduction).
- the holding in any company must not represent more than 15 per cent (by value) of its investments.
- its ordinary shares are listed on the London Stock Exchange
- it must not retain more than 15 per cent of the income it derives from shares or securities.