It may not be widely known, but it is possible to use funds from an Individual Savings Account (ISA) to invest in a Venture Capital Trust (VCT).

Venture Capital Trusts (VCTs) are listed investment companies on the London Stock Exchange, designed to invest in small UK businesses that meet specific criteria. To encourage investment in these companies, the government offers attractive tax benefits for VCT investors. This also reflects the higher risk associated with investing in these smaller, early-stage businesses.

VCTs focus on small or early-phase companies, either unquoted or listed on AIM (the London Stock Exchange’s secondary market for growth companies), which require investment to grow. While these investments have the potential for significant returns, they carry greater risks compared to investing in more established, larger companies.

If you’re interested in capital growth potential as part of a diversified investment strategy, you may want to explore the tax benefits that come with VCTs. One way to do this is by using spare cash or transferring existing ISA investments into a VCT.

You can transfer part of your current ISA or open a new ISA specifically for a VCT investment. This allows you to benefit from 30% income tax relief while maintaining the tax-efficient ISA wrapper. For instance, transferring £30,000 from your ISA into a VCT could enable you to claim £9,000 in Income Tax relief.

It could be argued you do not need to invest in a VCT through your ISA because VCT dividends are tax-free and the disposal of your VCT is free of Capital Gains Tax.  However, there remain advantages to this approach.

Firstly you get 30% Income Tax relief which is paid into your ISA without using up any of your ISA allowance. Secondly, the dividends remain tax-free forever not just for the 5-year qualifying period of the VCT as long as the VCT remains approved.  Finally, your ISA gets a boost from the Income Tax relief which potentially allows it to grow in value quicker than without a VCT investment. The VCT has to be owned for a minimum period of 5 years.

Before pursuing this type of investment, it’s essential to understand that VCTs carry more risk than traditional ISA investments. Therefore, it’s advisable to seek professional advice to determine if this option suits your financial situation and risk tolerance. You know it makes sense.*

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts. This blog is based on my own observations and opinions. VCTs are high-risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.