Venture Capital Trusts - are the dividends exempt?
Newsletter issue - March 2021
When preparing a tax return, it is easy to look at a dividend statement from a VCT and think "It's exempt" and simply file it away. Of course, in most cases this is probably sufficient. However, sometimes a little more care is needed.
Dividend exemption
Where an individual aged 18 or over acquires qualifying shares up to the permitted annual maximum of £200,000, any dividends paid on the shares whilst the VCT remains approved are exempt from tax. In addition, if the VCT shares are newly issued, the individual may qualify for income tax relief in a similar way to EIS shares.
The individual does not have to subscribe for new shares. VCT shares are traded on regulated markets and so it is relatively easy to acquire second-hand shares. The second-hand shares cannot attract income tax relief, which can only be claimed once in respect of the same shares, but the dividend tax exemption is available, provided the shares were bought for genuine commercial purposes. Exempt dividends do not need to be reported on a tax return.
VCT shares often form a substantial part of a managed investment portfolio. The investment manager will send a consolidated income certificate, and it is common practice to include the consolidated figures on the tax return It is important when preparing the income tax return to check whether qualifying VCT dividends have been accounted for properly, that is to say they have been left out of the consolidated income statement which is produced for tax purposes. If not, then a manual adjustment will need to be made.
Restriction: limit exceeded
In cases where shares with more than £200,000 are acquired in a tax year, the dividend exemption is restricted to the first £200,000 of shares bought. For example, if £300,000 shares were purchased, only 2/3rds of the dividends will be exempt.
Restriction: VCT approval withdrawn
Dividends are only exempt if the VCT retains its approved status. If this is lost, the treatment of dividends depends on the type of approval the VCT had:
- If the VCT had received full approval, but this is subsequently withdrawn, any dividends paid after the withdrawal date will be fully taxable.
- If the VCT approval was only provisional, and this is removed because (for example) some condition of the provisional approval was not met, the VCT is treated as never having been approved. In these circumstances, therefore, any dividends paid during the period of provisional approval will need to be taxed.