In the current economic and stock market climate, faster-expanding smaller companies have found that they can be financed on much better terms to the investor than before, with Alternative Investment Market quoted shares some 32% cheaper compared with a year ago. It is this factor alone that could make Venture Capital Trusts (VCTs) even more attractive than they were before to the right investor. However, you should always take independent advice before entering into this type of scheme.

Tax-free dividends
VCTs provide capital finance for small, expanding companies with the aim of making capital gains for investors as well as giving them tax-free dividends.

Up to 60% tax relief
Effectively, investors with capital gains chargeable at 40% could obtain up to 60% total initial tax relief on an investment in a VCT if they elect to defer the capital gains tax charge and obtain income tax relief (maximum 20%) on the investment. All dividends are paid out tax free, and investors do not pay tax on gains made on their investments. This means that a VCT could be an ideal long-term investment in many situations - for example, if you are seeking tax-free returns in the future or as a supplement to your pension income.
Because VCTs invest in a number of companies, and because up to 30% of the investments can be in low-risk areas, they are not as high risk as many investors might imagine.

The Financial Services Authority does not regulate taxation advice. Levels and bases of, and reliefs from, tax are subject to change. Because these investments may go down in value as well as up, you may not get back the full amount invested. Such investments may only be relevant to investors with particular tax liabilities and some could be regarded as higher risk.

article dated 05/2003