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VCTs hit the headlines in 2004 when the Chancellor doubled the income tax relief to 40%. Once regarded as the preserve of higher rate taxpayers, the increase in tax relief means that a £5,000 investment costs a basic rate taxpayer just £3,000*. Nor has the higher rate taxpayer been forgotten, with tax relief granted on investments of up to £200,000.

What are VCTs?

Venture Capital Trusts are funds that invest in smaller companies. They were launched in 1999 when the Government introduced significant tax incentives to encourage members of the public to invest into smaller unquoted companies. The Chancellor subsequently adjusted the taxation of these funds and until 6th April 2006 (at least) income tax relief has been doubled from 20%to 40%.

In addition to receiving 40% tax relief on investments of up to £200,000, investors benefit from both tax free growth and tax free income.

VCT companies may invest no more than £1million in any company whose gross assets do not exceed £15million. Typically, these companies will be quoted on AIM (the Alternative Investment Market) or may be unquoted investments.

Clearly, you must anticipate that the volatility and the degree of risk could be higher than for unit trusts invested in larger companies.

Questions & Answers

What is the minimum investment?
This varies, but is typically £3,000- £5,000.

How much tax will I save?
The net cost of your investment will be reduced by 40% - but you can't recover more tax than you have actually paid that year. For example, if you are due to pay £4,000 in tax this year, you can invest £10,000 in a VCT and recover ALL of that tax. However, if you invest £11,000 you will still only recover £4,000, not £4,400

How do I recover the tax?
When you receive your share certificate, you will also receive an income tax certificate. If you are employed or retired, send this certificate to your tax office, who will then either amend your tax code or send you a rebate cheque. If you are self employed, you should send the certificate with your tax return and your payment on account will be adjusted accordingly.

Will I receive a regular income?
VCT's pay two types of income. As well as dividends which are earned and distributed, VCT's can also pay out realised capital profits from the sale of underlying investments. Both types of payment are tax free.

How long do I invest for?
Any equity investment should be regarded as a long term holding - and if you sell the investment in the first 3 years you will have to repay the tax relief.

Is there a deadline?
Yes - you have until 5th April 2006 to qualify for the 2005/6 tax year, but bear in mind that some VCTs will close before the tax year end. The 2005/6 tax year could be the last tax year to enjoy 40% tax relief.

How should I select a VCT?
The same way that you select any equity investment. Who is managing the investment - do they have a proven track record in VCT management? Where are they investing? Are they investing in a broad spread of company sectors or are they investing in a particular sector? Contact Garrison to receive a guide to VCTs together with a selection of some of our preferred VCTs.

How do I invest?
Make sure you send your application form to Garrison to obtain our discount.

Extra Risk Warning for VCTs
VCTs are longer term, higher risk, investments and are not suitable for all. The value of your VCT can fall as well as rise and losses cannot be offset against other capital gains. A VCT's charges will generally be higher than for a normal unit trust, the share price may not reflect the full value of the underlying assets and the underlying investments can be more difficult to sell and more exposed to risk than mainstream equities. A VCT's tax status is not guaranteed and tax may be repayable if it fails to meet the requirements. Details of risks and charges can be found in the VCT's Securities Note - please read these prior to making your investment.

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