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Ask Justin

Ask Justin

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Are second hand VCTs tax-free?

Investment | Shares Helpful? 5

Asked by Tremorfaboy, submitted 08 May 2013.

Open Quote If you buy VCT shares in the market then you obviously don't qualify for the up-front tax relief. However, how are dividends treated? Should they be included in your tax return or, as I believe is the case with VCT shares that were subscribed for on issue, can they be simply left off it?

My reason for asking this is that some established VCTs seem to offer a pretty good (and relatively stable) yield based on the market price and (as part of a sensibly diversified portfolio) might provide an opportunity to get a good income stream.
End Quote

Answered by Justin on 05 June 2013

You raise a very good point - 'second hand' venture capital trust (VCT) shares continue to benefit from exemptions to tax on both dividends and gains. The only tax benefit you won't enjoy, versus investing in a new issue, is income tax relief on contributions.

Of course, dividends are never truly tax-free, they're paid out of taxable company profits and deemed to be received net of basic rate tax, which cannot be reclaimed. Nevertheless, this could still prove a useful tax saving for higher and top rate taxpayers. And there's no need to enter this income on your tax return.

However, bear in mind the (potentially high) risks of VCT investing. Aside from underlying investment risk, VCTs often trade with wide spreads between buying and selling prices - some of the smaller trusts can prove especially difficult to sell. On the plus side this means you might grab a decent deal when buying second hand, but expect to be hit when trying to sell in future.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .

Comment by Tremorfaboy at 4:36pm on 06 Jun 2013:

Very helpful response - many thanks. I've noticed that several VCTS seem to settle down to a share price which isn't far off their original net-of-tax cost. If the dividend level is sustainable then buying a few extra shares in the market is quite a good way of boosting the yield. Your point about the extra risk associated with VCTs is entirely taken.