We have had a number of requests in recent days from advisers and investors asking about the tax breaks available to investors in a VCT. I thought it might be helpful if I ran through the main elements of income tax and capital gains tax relief available in a VCT.
Income tax
Relief on subscription
An investor subscribing for shares in a VCT will be entitled to claim income tax relief on amounts subscribed up to a maximum of £200,000 in any tax year. The relief is given at the rate of up to 30% on the amount subscribed, subject to an amount which reduces the investor’s income tax liability to nil. Relief may not be available where the investment is used as security for, or financed by, a loan.
Dividend relief
An investor who acquires, in any tax year, VCT shares up to a maximum of £200,000 will not be liable to income tax on dividends paid by the VCT on those shares whilst the Company qualifies as a VCT.
Withdrawal of relief
All or some of the income tax relief on subscription for shares in a VCT is withdrawn if the shares are disposed of (other than between spouses) within five years of issue or if the VCT loses its approval within this period.
Capital gains tax
Relief from capital gains tax on the disposal of shares
Any gains made on VCT shares are not subject to capital gains tax. Similarly, any losses on shares held in a VCT will not be treated as an allowable loss. Both of the above apply to the extent that the shares have been acquired within the limit of £200,000 for any tax year.
Purchasers in the market
An individual purchaser of existing shares in the market will be entitled to claim relief from capital gains tax on disposal (as described above) while the Company is still a VCT.
Withdrawal of relief
If a VCT which has been granted approval subsequently fails to comply with the conditions for approval, any gains on the shares after the date on which loss of VCT status takes effect will be taxable. Where VCT status is treated as never having been given, all gains are taxable.
Obtaining tax reliefs
Income tax relief
The VCT will issue each investor with a certificate which should be used to claim the income tax relief, either by obtaining from HMRC an adjustment to his/her tax coding under the PAYE system, or by waiting until the end of the tax year and using his/her Self Assessment Tax Return to claim relief.
Investors not resident in the UK
Investors not resident in the UK should seek their own professional advice as to the consequences of making an investment in a VCT as they may be subject to tax in other jurisdictions as well as in the UK.
Loans and VCT reliefs
VCT reliefs may not be available if the investor takes out a loan specifically to subscribe in the VCT.
If you have any questions relating to tax relief in VCTs, or any other aspects of VCT investing, please do let me know.
Julian
0207 332 5664 or jhickman@longbow.co.uk
