With effect from 6 April 2004, for an aggressive investor there are now even more attractive reasons for investing in a Venture Capital Trust (VCT), in terms of the tax relief available and the tax reasons for investing. VCT schemes are intended to encourage investment in small businesses by private investors, through a pooled structure. Historically they have provided income tax relief upon investment and the deferral of capital gains tax on disposals of other shares or investments.

Tax Relief
The amendments to VCTs mean that the emphasis is now on the tax relief available on investment. This is given as a deduction from the individual’s income tax bill. The maximum annual investment eligible for income tax relief has increased to £200,000 and most significantly, where shares are issued in the two-year period from 6 April 2004 to 5 April 2006, the rate of income tax relief has been enhanced from 20% to 40%. These changes boost the attractiveness of VCTs to those who have considerable amounts of income taxable at the higher rate and who have a higher risk-reward profile.

Farewell Deferral Relief
It is important to note that it is now no longer possible to defer capital gains tax by the acquisition of VCT shares. However, the additional 20% income tax relief is meant to compensate for the loss of deferral relief.

Where a VCT investment was made prior to 6 April 2004, any gains made within one year after the investment may still be deferred and any gain made in relation to the growth in value of shares in VCT companies continues to be exempt from capital gains tax. Any dividend income from shares held in VCT investments continues to be exempt from tax. Tax freedom from CGT and on dividends is only available on shares purchased within the £200,000 annual limit.