Setting up a business requires resources, and a cash amount is a necessity. Usually, small businesses are supported by business firms through investments. This is generally known as venture capital. If you own an established business and want to invest in a start-up business, this investment also comes with an imposed tax by the UK government. This article provides all the details about VCT tax relief allowed by the government.
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What is VCT Tax Relief?
Venture capital is a kind of financing for a start-up business and small companies that have long-term growth potential. The venture capital for small businesses and companies comes from investors, investment banks and financial support institutions. Venture capital also encompasses factors other than money, such as managerial or technical expertise given by expert businessmen. The venture capital firms generate capital from limited partners for investment in potential startup businesses or even larger venture funds.
What are the Types of Venture Capital?
The types of venture capital are listed below
1- Pre-Seed
Pre-seed, as the name suggests, is the earliest stage of business development. At this stage, the founders of the start-up business try to bring their idea into reality. For this purpose, they may register with a financial firm for early funding and other related matters.
2- Seed Funding
At this stage, the new start-up is ready to launch its first product, but there are no funds available for production. Here comes the help of venture capital to fund the strategy business at each stage.
3- Early-Stage Funding
At early-stage funding, the business developed its first product, and now it needs additional capital for production, buying raw materials, salsa, and marketing expenses. The business may need periodic rounds of funding from venture capitals labelled as series A, series B, etc.
Venture Capital Trust in the UK
The venture capital trust (VCT) scheme was introduced in 1195 in the UK. It is one of the three tax-based schemes introduced for supporting new businesses and small start-ups in the UK. The venture capital trust is crafted to encourage individuals to invest in small, high-risk trading companies that have growth potential in the future. In the venture capital trust scheme, the fund managers are usually managers of large business setups. The investors buy shares in venture capital, which helps companies develop and grow.
Reliefs to Shareholders
To promote new businesses and help them grow by encouraging big businesses to invest in new start-ups, the UK government has provided some relief to venture capital trust investors, who are
Income Tax Relief
Individual shareholders in venture capital trusts above 18 years of age can claim income tax relief. They can claim income tax relief at a 30% rate if their annual investment is £200,000. The claim can be made if they hold their shares in the start-up business for up to at least five years.
When You Can Claim Income Tax Relief?
For the tax relief schemes introduced by the UK government, the tax relief can be claimed in the current tax year on the following conditions:
- You invest in the current year
- Before making an investment, if some or all the investments were made in the current or previous year.
The tax relief can only be claimed against the amount of income tax you are imposed while living in the UK. This tax relief cannot be claimed for future investments.
The tax relief can only be claimed for the tax year in which the investment is made, not for future or previous tax years. There is no need to pay income tax on dividends from a venture capital trust. It applies to both new shares and already owned ones.
The income tax relief cannot be claimed if you invest through an enterprise investment scheme and buy new shares in a company unless the shares you own
- were issued to you when the company was formed
- have had a compliance statement submitted for them
- Dividends
There is a tax relief for dividends from ordinary shares in venture capital trusts. No income tax is to be paid in such case.
- Capital Gains Tax
The capital gains tax is usually imposed on the annual profits of a company. The profit earned from ordinary shares by investors of capital venture trusts is exempted from capital gains tax.
These tax reliefs in venture capital trusts are available to individuals and not to trusts, companies, or other investors in VCTs. The tax reliefs from income tax and capital gains tax are available to the individuals who buy the shares from the stock market or by inheritance. The front-end tax relief is only enjoyed by buyers of new shares in VCTs.
Defer When You Pay Capital Gains Tax (Deferral Relief)
The immediate payment of capital gains tax is not imposed if you use your profit from the sale of any asset to invest in a company that qualifies the conditions for the Enterprise Investment Scheme. The investors need to pay the tax when:
- They discard the investment in the current tax year
- The investment is cancelled or paid by the company
- You are a non-resident in the UK
Capital Gains Tax Exemption When You Sell Your Investment
If you invest in a company through either the Enterprise Investment Scheme, Seed Enterprise Investment Scheme, or Social Investment Tax Relief, the capital gains tax is not imposed on the amount invested if the following conditions are fulfilled:
- If you have already received income tax relief on the investment, which is not disposed of
- If you held the shares in the company for the due time limit of at least 3 years.
If you invested your money in a venture capital trust, there is no liable amount of capital gains tax paid by the investor. This is applied to new and old shares.
When You Will Not Get VCT tax relief on Your Investments?
There are certain conditions where tax relief cannot be claimed by the investors. The conditions are
- If your associates are employed by the company or its branch. This does not apply to directors.
- If you hold more than 30% of the company’s shares
- rights to assets if the company is wound up
- voting rights
- loan capital for Social Investment Tax Relief
Shares that Qualify for VCT tax relief
For all investment schemes introduced by the UK government, the shares must be new or fully paid for income tax relief. The tax relief can only be claimed if the company accepts payments on new shares; the shares are not redeemable, and no rights to the company are associated with the shares.
Conclusion
To promote small start-ups and new businesses in the UK, the government has introduced schemes for encouraging big businesses and firms to invest in companies that have growth potential. There is some VCT tax relief provided by the government. The relief is given on dividends, income tax relief, and capital gains tax relief. To claim VCT tax relief on shares, the investor must keep his shares for five years in the company. The tax cannot be claimed if the investor owns the shares that are associated with more than 30% of the company assets. The capital gains tax is deferred if the shares are disposed of by the investor and his associates.
Reach out to our intelligent and clever-minded guys to get the answer to your queries in the UK, we will get to your answers quickly. We will help to decide how to deal with your tax implications.
Disclaimer: The information about the VCT tax relief provided in this blog includes text and graphics of general nature. It does not intend to disregard any of the professional advice.