Times are hard for savers and investors at the moment. Interest rates have been incredibly low for some time now, and people are being punished for looking after their money. However, instead of leaving your capital at the mercy of high street savings accounts, it may be time to invest in a VCT.
What is a VCT?
A venture capital trust is a publicly traded company that invests in start-up firms and unlisted businesses. They provide much-needed capital for expansion and growth, and in return they get portions of the businesses they invest in. You can buy shares in these trusts, and grow your capital through the value of those shares. And just like any other type of public company, your shares will earn you a steady stream of dividend payments.
Avoid income tax
When you earn an income from dividend payments paid by regular companies, you are liable for income tax. However, the special exception afforded to a VCT investment means that any income you earn through dividends is completely tax free. If you spread your capital across several VCTs through the same provider, you could be able to earn a very healthy income whilst escaping the clutches of HMRC.
Leave more to your loved ones when you’re gone
Inheritance tax currently stands at 40 percent, and it kicks in on estates over £325,000. That may sound like a lot, but add an average house in the south of England to any inheritance, and your loved ones could already be looking at losing a hefty chunk of their legacy. However, invest in a trust of this type, hold your shares for at least two years before you die, and you can leave your investment to loved ones without your heirs being liable for inheritance tax.
Avoid capital gains tax
Venture capital trusts look for potential, great ideas and motivational leadership. And because they invest at the very early stages of a company’s development, the returns can be significant. In normal circumstances, if you were to sell your shares at a profit, you would be liable for capital gains tax. However, because the government is keen for savers to plug the investment gap left by major banks, any profit you make will be exempt from capital gains tax. As these schemes often involve many years’ of share growth, the tax you could save is significant.
Get back a slice of your income tax
Of course, venture capital trusts give you the opportunity to grow capital and earn an extra income – and those benefits alone are reason enough to get involved. However, perhaps the most eye-catching benefit involved is the ability to claim a tax rebate from HMRC.
You can claim up to 30 percent of your investment back as an income tax rebate – as long as you have paid at least that much in tax. For instance, if you have invested £10,000 in VCTs in a financial year, you can claim up to £3,000 from the tax man.
Young and ambitious entrepreneurs have fantastic business ideas in the fields of technology, renewable energy and healthcare. Unfortunately, the reticence of the banks to lend after the banking crash of 2008 has meant much of this potential has been lost. The government has moved to improve this chronic lack of credit by providing investors with some very lucrative tax benefits. Make your hard-earned capital work for you, and you can cut your tax burden in the process. It makes sound financial sense.
These do sound like a really attractive investment opportunity. Is there much transparency on what they decide to place their venture capital in? Do they tend to specialize in any one industry or sector? I would be hesitant with a VCT for the simple fact that the only ones I ever hear much of are those investing in social media companies and tech start-ups. Of course we hear about all of the Facebook’s and even the flops who receive millions in start-up but many do fail. What do you think?