Tax Benefits and Investment risks relating to Venture Capital Trusts

Tax Benefits

VCTs offer significant tax advantages over most investment products.

Investments in new VCT shares

For new VCT shares, in summary, the tax reliefs available on investment are:

  • Income tax relief of up to 30% on the amount invested in new VCT shares
  • Tax free dividends
  • Tax free capital gains

These reliefs apply on amounts invested up to £200,000 per person, per tax year, for individuals aged 18 or over who are UK taxpayers.

Income tax relief is only available for set-off against any income tax liability due, whether at the lower, basic or higher rate.

Income tax relief will not be available, or, where given, will be withdrawn where there is any disposal (except on death) of the shares before the end of the period of five years beginning with the date on which the shares were issued to the investor.

Shares are “new” if they are acquired by an investor directly from the VCT via, for example, an offer for subscription.

Investments in existing VCT shares

For existing VCT shares, the tax reliefs available on investment are:

  • Tax free dividends
  • Tax free capital gains

These reliefs apply to investments within the same £200,000 per person, per tax year amount referred to in Investments in new VCT shares above. The reliefs apply to individuals aged 18 or over who are UK taxpayers.

There is no minimum holding period for these tax reliefs for investors in existing VCT shares.

Shares are “existing” if they are acquired from another investor in the VCT.

General

The above is only a general and non-exhaustive summary of the UK tax position of certain individual investors in VCTs and is based on Pembroke VCT plc’s understanding of law and practice at the time of writing. Investors and potential investors should note that tax law and interpretation can change (possibly with retrospective effect) and that, in particular, the levels, basis of and reliefs from taxation may change.

The tax treatment of investors in VCTs will depend on their individual circumstances. Potential investors are recommended to consult their own appropriate professional adviser as to the taxation consequences of their investing in a VCT. Nothing in this document constitutes legal or tax advice.

Certain Investment Risks Associated with Venture Capital Trusts

  • An investment in new shares of a VCT should be regarded as long-term in nature as a sale by investors of their shares within 5 years will require a repayment of the income tax relief obtained and is, therefore, not suitable for all individuals.
  • Although shares in Pembroke VCT plc are listed on the Official List and admitted to trading on the London Stock Exchange, shares in VCTs are inherently illiquid and there may be a limited market in the shares primarily because the initial income tax relief is only available to those subscribing for newly issued shares and shareholders may, therefore, have difficulty in selling them.
  • Levels and bases of, and relief from taxation are subject to change. Such change could be retrospective. The value of tax reliefs depends on the personal circumstances of holders of shares, who should consult their own tax advisers before making any investment. There can be no guarantee that Pembroke VCT plc will fulfil the criteria to maintain its VCT status. If a VCT fund loses its approval as a VCT before investors have held their shares for five years, the income tax relief obtained will have to be repaid by such investors. Following a loss of VCT status, an investor will be taxed on dividends paid by the VCT fund, and in addition, a liability to capital gains tax may arise on any subsequent disposal of shares.
  • VCT shares will usually trade at a discount to their underlying net asset value. The value of an investment in a VCT fund depends on the performance of its underlying assets and that value and the income derived from the investment may go down as well as up and an investor may not get back the amount invested.
  • As a VCT, Pembroke VCT plc invests in smaller, unquoted companies (usually with limited trading records which require venture capital). Such investments, by their nature, involve a higher degree of risk than investments in larger or longer-established businesses. In particular, small companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals. In addition, the market for shares in smaller companies is often less liquid than that for shares in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such shares. Proper information for determining their value or the risks to which they are exposed may also not be available.
  • Realisation by a VCT fund of its investments may be difficult and take considerable time. Constraints may be imposed on the realisation of investments in order to maintain the qualifying status of a VCT which may restrict the VCT’s ability to obtain maximum value from its investments.

The above list of risk factors is not intended to be exhaustive but sets out certain risks associated with holding shares in a VCT and arising from the typical underlying investments of a VCT.