The VCT scheme was introduced in 1995. In some ways, this could be viewed as an extension to the Enterprise Investment Scheme (EIS). VCT investments are effectively a collective investment trust which invests in a number of EIS-type companies, effectively spreading the risk. The scheme is aimed at investors who wish to invest in new and expanding companies and obtain the associated tax breaks, without putting all of their eggs in one basket. 

The tax reliefs for investing in a VCT scheme are not as generous as the reliefs available under the EIS but they still remain attractive: 

Income tax relief
The investor may invest up to £200,000 in a tax year and obtain a tax reducer of 30% of the amount of investment. Dividends received are not subject to income tax.

Capital gains tax exemptionIf the investor has received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of, any capital gain on the disposal of the EIS shares will be exempt from capital gains tax. There is no minimum period of retention for which the shares must be held.

Let us look at some of these reliefs more closely by way of an example:

Mr Greenwood has taxable income, after allowances, for 2012-13 of £200,000. He makes a VCT investment on 1 November 2012 of £100,000.

He has been told that he could significantly reduce his tax liabilities if he makes an investment under a VCT scheme and is considering an investment of £100,000.

Let us compare his tax position, firstly on the assumption that he makes no EIS investment, then with the position if he makes the £100,000 EIS investment; see this table.

In the scenario in this table, Mr Yorke has achieved a tax saving equal to 30% of the cost of the investment or, to put it another way, he has made a £100,000 investment at a cost of £70,000. 

On the eventual disposal of the shares, any gain will be free of capital gains tax.