What is a Venture Capital Trust?
A Venture Capital Trust is an investment trust listed on the London Stock Exchange which offers investors the ability to invest in small unquoted, OFEX or AIM Listed companies. The Venture Capital Trust is run by an experienced fund manager and builds up a portfolio of investee companies, providing the investor with a spread of risk. For example, an investor in a £40m size Venture Capital Trust may typically find his money invested in between 30 to 40 companies.

What changes were announced in the March 2006 Budget?
In the March 2006 Budget, the Chancellor of the Exchequer announced a number of changes to the tax benefits for VCT private investors for subscription on or after 6 April 2006.

The following is a summary of the tax incentives for VCT investors that will apply on or after 6 April 2006:

• Income tax relief for investments in qualifying VCT shares is to be decreased from 40% to 30%.

• The Gross Assets test for investee companies must not exceed £7m before the VCT invests or £8m after the VCT invests

• The minimum hoding period for VCT investors is increased from three years to five years.

Why were they introduced?
They were introduced on 6 April 1995 with the first Venture Capital Trust appearing in September that year. The intention was to encourage investment in small companies which were finding raising funds, generally in the £500,000-£1,000,00 range, difficult. Venture capitalists tend to find larger deals more rewarding and a funding gap was identified below the £1m level.
The Venture Capital Trust was directly targeted at increasing funding into this "funding gap" by offering tax incentives for investors.

What are the tax incentives?
There are four tax incentives on offer.

Investors in new Venture Capital Trust shares receive 30% income tax relief in the year of subscription.

Investors in both new and secondhand shares receive exemption from income tax on dividends from Venture Capital Trusts and from capital gains tax on gains made from selling Venture Capital Trust shares.

To receive the reliefs, an investor must be over 18 and cannot invest more than £200,000 in any tax year. The income tax relief on new shares is only available if the shares are held for a minimum of five years.

The effect of the reliefs for a purchaser of new Venture Capital Trust shares is as follows:

Income tax relief at 30%

To take advantage of the income tax relief, the investor must have an income tax liability of at least £6,000 in the year of investment.