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A decent income stream for higher-rate taxpayers

A decent income stream for higher-rate taxpayers

If you want to achieve a decent income stream and are subject to the upper income tax bands, you face a twin dilemma.

Income is hard to find as interest-rates remain at record lows, bond markets are being distorted by Central banks and many traditional UK equity income stocks have enjoyed strong runs. Achieving an inflation-beating income in the current environment is going to mean taking some risk.

And then of course, Income Tax rates continue to be as high as 45% but the scope to reduce your liability may well be reduced by the planned reductions from 2014 in both the annual and lifetime pensions allowances respectively from £50,000 to £40,000 and £1.5 million to £1.25 million.

Given this conundrum, we expect Venture Capital Trusts (VCTs) to be on the radar for a growing number of investors who want to reduce their tax burden through legitimate, HM Revenue & Customs-backed schemes and build an attractive income steam alongside investing in more conventional accounts such as ISAs and pensions.

Of course VCTs aren’t going to suit every investor: they are higher-risk investments that invest in either unquoted or AIM-traded companies and they are longer-term investments that must be held for at least five years in order to keep the Income-Tax credits received on subscriptions. They clearly are not suited for investors who are non-taxpayers.

However, to help mitigate some of the risks of VCTs they do offer investors a combination of generous tax incentives, including a 30% tax credit against new subscriptions if held for at least five years and also tax-free dividends and gains.

While typically VCT fund raising is very seasonal, with launches targeted towards the end of the tax year, one of the leading VCT houses, NVM has just launched a £50 million fund raising across its three VCTs which we have awarded a five-star rating, the highest possible. Based on the current dividend policies of these VCTs and the tax incentives, the average tax-free yields across these VCTs are a highly attractive 8.8% per annum, equivalent to a gross yield of 12.68% for a 45% rate Income-Tax payer or 11.74% for a 40% taxpayer. While the Northern, Northern 2 and Northern 3 VCTs have good dividend records, it is important to point out that these yields are not guaranteed.

To find out more about VCTs, including the risks, download our free Venture Capital Trusts Guide. For details of VCTs currently open for investment including our research notes, discounts, application forms and ratings click here.

The value of your investment can go down as well as up, and you can get back less than you originally invested.

The Bestinvest Online Investment Service, including any account analysis and investment reports provided by our guidance services, is an online execution-only dealing service for investors who want to make their own investment decisions. It does not provide advice on the suitability of products and investments; if you are unsure about the suitability of any investment you should seek professional advice. Clients of our Investment Advisory Service and Managed Portfolio Service can use the website to obtain current valuations of their investments but cannot trade on these accounts online and should call their adviser if they wish to discuss changes to their investments.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Bestinvest, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

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© Tilney Bestinvest Group Ltd 2016.

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