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All or some of the income tax relief on subscription for shares in a VCT is withdrawn if the shares are disposed of (other than between spouses) within five years of issue or if the VCT loses its approval within this period.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

Budget Update

The budget statement this week regarding EIS and VCT was very straightforward, with little that was new. However, it could have been much worse.

Although CGT has gone up, nearly all other reliefs have been preserved. This is particularly helpful for investors looking to reduce inheritance tax (IHT) liability and to make allocations to venture within their pension.

With the immediate rise in CGT rate to 28%, we anticipate a swift increase in interest in the Enterprise Investment Scheme as the higher CGT rate now enhances the value of investing under EIS. Investors will be keen to know how they can defer their CGT bill, whilst at the same time contributing to driving innovative British companies forward with an investment that will be free of CGT. By combining 20% income tax relief with 28% CGT deferral relief, investors can now make a tax saving of up to 48p for every £1 invested. Furthermore, once the investment has been held for 2 years it qualifies for 100% BPR, effectively delivering a further 40p of tax relief for every £1 invested in IHT relief.

The coalition Government has acknowledged the need to reduce the structural deficits through raising tax rates on individuals. However it has at the same time, determined measures to help stimulate economic growth and reduce the tax burden on businesses. This should act as the main driver to improve the longer term economic prospects of the UK economy.

We are pleased to see that the Chancellor has made no material change to the Enterprise Investment Scheme. This is good news for advisers and their clients as EIS provides a powerful combination of tax reliefs for them as they look to reduce their tax burden.

And, with forthcoming increases in higher rate tax about to hit hard, investors need all the help they can get.

It is a shame that the Chancellor didn't take the opportunity to simplify the EIS structure, which is unnecessarily complicated. That is something we hope the next government might address as the current structure distracts investors from supporting enterprise and innovation.

A number of advisers have contacted us recently concerned that the budget on the 23rd March could contain changes to the EIS rules that might affect their clients' investment in our funds.

This is particularly relevant to advisers who have clients that have applied to invest in the 2010 Approved EIS Fund.

As soon as we know the detail of the budget we will discuss the changes, if any, to EIS reliefs with each adviser and how that may, or may not, affect their clients.

We can then confirm whether or not their client is invested in the right fund for them to maximise their EIS relief, and if we need to make changes, make sure they are undertaken in time for the tax year end.

We will also provide an update on our website for any changes that are announced to EIS relief in the days following the budget.