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.