What are Venture Capital Trusts?

When a group of investors pools their resources to buy stocks or securities, the group is called a trust. The members of the trust share both the risk and the reward of investments they might not have been able to manage on their own. Venture capital trusts are a form of trust available in the United Kingdom (UK). They invest in small high-risk trading companies, providing capital for these small companies with lower risk to the investor.

Venture capital trusts are run by fund managers. Investors buy shares in the venture capital trust. Then the fund manager invests the money from those shares into several small, growing companies. The shares and securities the manager buys are not listed through the London Stock Exchange. Without venture capital trusts, such investments would be difficult.

Great Britain created venture capital trusts in April 1995 as a way to help small companies acquire the capital they needed to grow. In order to be recognized as a venture capital trust, a company must be approved by Her Majesty's Revenue and Customs (HMRC). Sometimes known as HM Revenue and Customs, HMRC is the branch of the British government that collects taxes and performs other finance-related functions.

A company must meet certain conditions to gain approval from HMRC. For example, the company must make most of its money from shares and securities. At least 70 percent of the company's investments must be in the kinds of small, growing companies that venture capital trusts were designed to help. At the same time, the company should not invest to heavily in any one small business. Other criteria also apply. Approval can be revoked at the discretion of HMRC if the company fails to meet these conditions in any accounting period.

In order to make venture capital trusts more attractive to investors, the British government has approved certain tax breaks for investors. Dividends from ordinary shares in venture capital trusts are exempt from income taxes. This is known as dividend relief. In addition, if certain conditions are met, the investor is also exempt from paying capital gains tax on any profit made when venture capital trust shares are sold. This is known as disposal relief.

Investors may also be eligible for an income tax relief of 30 percent on the buying of new shares. This tax benefit can only be collected in the year that the shares were issued. In addition, the investor must agree to hold the shares for no less than five years in order to be eligible. If the venture capital trust loses its approval, all tax benefits are revoked from its members.