Cuts to pension allowances stoke VCT interest
With yet another cut to the pensions lifetime allowance set to be implemented on 6 April 2016 and plans to taper down the annual contribution allowances for those earning £150,000 upwards, more investors are going to have to look beyond pensions for their long-term investments. Of course, Individual Savings Accounts are usually the first port of call and rightly so. They offer a combination of tax efficiency with no time limits on how long an investor must stay invested and an incredible amount of choice as to what can be held within them.
But for those already fully utilising their ISA allowances and who have maximised pension opportunities, Venture Capital Trusts (VCT) can be a useful part of an overall portfolio for investors who are comfortable with the high-risk nature of these investments.
VCTs are a long-established investment scheme, first introduced by the Government in 1995 to provide a source of funding for UK small companies. VCTs are investment companies, listed on the stock exchange, which invest in small, unquoted or AIM-listed businesses that meet certain criteria. To encourage investment into these types of businesses, which are regarded by many as the backbone of the UK economy, the Government provides investors in VCTs with generous tax breaks to incentivise them for the inherently high level of risk when investing in small, illiquid companies. Before investing, you should familiarise yourself with the Important Information at the bottom of this page.
The key tax advantages include a 30% Income Tax credit on investments into VCT new share issues, providing the investor has incurred an equivalent Income Tax liability during the tax year the Income Tax credit is being claimed, and that the investor also holds the VCT shares for at least five years after being allotted the shares. Once invested, VCT dividends and gains are tax-free. Like any share dividend income, it is important to understand that this isn’t guaranteed, but such levels of income are attractive compared to those found on other types of investment in the current environment, especially when you consider they are tax-free. And of course, no matter how attractive the tax benefits seem, it is important to only hold a modest proportion of an overall investment portfolio in specialist, higher-risk investments such as VCTs.
While investor demand for VCTs is expect to remain strong given further cuts to pension limits, it is also the case that supply is limited as VCTs only raise cash each year that the managers believe they can find suitable companies to invest in. There are inherently a finite number of opportunities given the strict rules over the types of businesses that can receive VCT backing. The good news is that that there are several decent quality VCTs open for new investment. To find out more download the latest edition of our VCT Review here.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Past performance is not a guide to future performance.
VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.