A Venture Capital Trust (VCT) is an investment company, broadly similar to an investment trust, which has been approved by HMRC. Investors subscribe for shares in the VCT and this money, after fees have been deducted, is pooled and used by the fund manager to invest in or lend money to small unquoted companies, including companies that are listed on AIM or ISDX. There are complex rules with which a VCT must comply that are designed to channel investments into small companies with certain characteristics, known as qualifying companies. For example, in most cases they must have less than 250 employees and gross assets of less than £15 million. Most of the companies are registered in the UK.
By virtue of the size of the qualifying companies, investments in them (known as qualifying investments) carry greater risk than those made in larger companies, although they also have the potential to deliver significant capital growth over the medium to long term. To encourage investment into VCT schemes, the government has put in place a number of incentives in the form of income tax relief, dividend tax relief and capital gains tax relief. The income tax relief is only available on new shares issued by the VCT, whilst the dividend tax relief and the capital gains tax relief is available on new VCT shares and existing VCT shares bought through the London Stock Exchange.
The VCT shares themselves are quoted on the London Stock Exchange Main Market and can therefore be bought and sold at any time, although an investor will lose some or all of their tax reliefs if they sell their shares before the fifth anniversary of their issue.