Venture Capital Trusts (VCTs) have always been viewed as highly useful when looking at someone’s tax planning. Over time VCTs have become more mainstream and for certain clients are just another way to invest tax efficiently.
VCTs are publicly-listed companies which invest money in small UK businesses who are not quoted on the main stock exchanges. The government created them to They were introduced by the government in 1995 to encourage investment in this vital area of the economy. A key part of this was to offer tax relief on new investments. VCTs currently offer tax relief of 30% on investments up to £200,000 each year. This is dependant on the investor holding the VCT for 5 years.
This means you could reduce your tax bill by up to £60,000. There is also no tax to pay on any dividends or capital gains.
What are the risks?
VCTs invest in smaller, less established companies. This type of investing will not fit everyone’s risk profile. The value of a VCT investment, and any income from it, can fall as well as rise and you may not get back the full amount invested.
The share prices of VCTs can move around more than other companies you will find listed on the London Stock Exchange’s main market. They can also be harder to sell. Also bear in mind that tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its VCT-qualifying status.
Using VCTs to plan for retirement
The amount high earners can pay into pensions without penalty can be as low as £10,000 pa. Also, the total amount of pension benefits you can have has decreased by around 40% from its height to £1,073,100 now (20/21). If you are worried about these limits, a VCT is might be a useful alternative.
A VCT can be a tax-efficient way to invest, which can sit alongside and complement pension and ISA pots. However, it is important to remember that VCTs have a different risk profile to traditional retirement planning investments.
Until 2017, buy-to-let landlords could deduct their mortgage payments from their rental income and only pay tax on the net income. Now they only receive a basic rate tax credit meaning higher or additional-rate taxpayers will not get all the tax back on their mortgage repayments.
This is part of a broader shift which has made investing in rental property less lucrative. These recent changes have made it even more important for landlords to consider the tax implications of their property investments.
If you are comfortable with the risks, a VCT may be a good way to reduce the tax you pay on your property income.
If you own a business, you may have been affected by recent changes to dividend taxation. These mean entrepreneurs who pay themselves through dividends could face higher tax bills and lower take-home earnings. VCTs could help offset these costs and extract money from a business more tax efficiently.