Capital Gains Tax Exemption by 26WIJj8

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A guide to

Venture Capital Trusts (VCTs)

A SIMPLE GUIDE TO VENTURE CAPITAL TRUSTS
This is a basic guide prepared by the Technical Advisory service for members and their clients. It is
an introduction only and should not be used as a definitive guide, since individual circumstances
may vary. Specific advice should be obtained, where necessary.




The Venture Capital Trust Scheme was introduced in 1995. In some ways, this could be viewed as an
extension to the Enterprise Investment Scheme (EIS). VCT investments are effectively a collective
investment trust which invests in a number of EIS-type companies, effectively spreading the risk. The
scheme is aimed at investors who wish to invest in new and expanding companies and obtain the
associated tax breaks, without putting all of their eggs in one basket.


The tax reliefs for investing in a VCT scheme are not as generous as the reliefs available under the
EIS scheme but they still remain attractive:


1. Income Tax Relief
The investor may invest up to £200,000 in a tax year and obtain a tax reducer of 30% of the amount
of investment. Dividends received are not subject to income tax.


2. Capital Gains Tax Exemption




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If the investor has received Income Tax relief (which has not subsequently been withdrawn) on the
cost of the shares, and the shares are disposed of, any capital gain on the disposal of the EIS shares
will be exempt from capital gains tax. There is no minimum period of retention for which the shares
must be held.
Let us look at some of these reliefs more closely by way of an example:


_____________________________________________________________________


Mr Greenwood has taxable income, after allowances, for 2012/13 of £200,000. He makes a VCT
investment on 1 November 2012 of £100,000


Mr Greenwood has been told that he could significantly reduce his tax liabilities if he makes an
investment under a VCT scheme and is considering an investment of £100,000.


Let us compare his tax position firstly on the assumption that he makes no EIS investment with the
position if he makes the £100,000 EIS investment:


 Without EIS investment:                      With £100,000 EIS Investment:




 2012/13 Income Tax                           2012/13 Income Tax
 Position:                                    Position:


 Taxable income                200,000        Taxable income              200,000


 Income tax thereon:                          Income tax thereon:
 34,370 x 20% =                6,449          34,370 x 20% =              6,449
 115,630 x 40% =               46,252         115,630 x 40% =             46,252
 50,000 x 50% =                25,000         50,000 x 50% =              25,000
                               78,252                                     78,252


                                              Less:
                                              Tax reducer (EIS
                                              investment):
                                              £100,000 x 30% =            -30,000




 Income tax liability          £78,252        Income tax liability        £48,252




                                                      2
 Tax saving:                                                                          £30,000




In the above scenario, Mr Greenwood has achieved a tax saving equal to 30% of the cost of the
investment or, to put it another way, he has made a £100,000 investment at a cost of £70,000.


On the eventual disposal of the shares, any gain will be free of capital gains tax. The quid pro quo is
that there any capital losses are not allowable.




ACCA LEGAL NOTICE

This is a basic guide prepared by the ACCA UK's Technical Advisory Service for members and their clients. It should not
be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where
necessary.




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