When preparing a tax return, it is easy to look at a dividend statement from a VCT and think it’s exempt and file it away. Of course, in most cases, this is enough. But, sometimes a little more care is needed.
Where an individual acquires qualifying shares up to £200,000. Any dividends paid on the shares whilst the VCT remains approved are exempt from tax. Besides, if the VCT shares are issued, the individual may qualify for income tax relief.
The individual does not have to subscribe to new shares. VCT shares are traded on regulated markets and so it is easy to get 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 large part of a managed investment portfolio. The investment manager will send a consolidated income certificate. 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. That is to say, they have been left out of the consolidated income statement. If not, then a manual change 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Restriction: VCT approval withdrawn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If the VCT has received full approval, but this is withdrawn, any dividends paid after the withdrawal date will be taxable.
If the VCT approval was only provisional, and this is removed because some condition of the provisional approval was not met, the VCT is treated as never having been approved. In these circumstances, any dividends paid during the period of provisional approval will need to be taxed.