The amount that can be invested in pensions – the traditional first port of call for reducing an Income Tax liability – has steadily been restricted through reductions in recent years. As a result, there has been an increased interest in alternative HMRC-approved tax-efficient investment schemes from investors who are already maximising core tax-efficient allowances.
Published on 21 Nov 20196 minute read
Written by Jason Hollands
2019 will surely have a special significance in future pub quiz nights, as being the year when the UK unusually had no Budget day. A planned “6th of November Budget” was scrapped; instead, the country is now in the midst of a pre-Christmas General Election campaign.
With all the major political parties making significant spending pledges, attention is likely to focus on these plans and their financing in the near and longer term through both taxation and borrowing. According to HMRC estimates for 2018/19, a record 4.26 million people already pay Income Tax at the higher rate and a further 410,000 at the additional rate. For some, Income Tax could be set to rise sharply depending on the poll choices voters will make.
The options for mitigating high Income Tax bills have become more limited in recent years; this has happened because the amount that can be invested in pensions – the traditional first port of call for reducing an Income Tax liability – has steadily been restricted through reductions in the allowances. These restrictions include the amount than can be accumulated in pensions over a lifetime without incurring penalties, as well as the amount which can be invested in pensions each year.
One of the most recent moves to ration access to pension tax reliefs has been the introduction of a tapered annual pension allowance for higher earners in 2016. The usual £40,000 annual allowance reduces by £1 for every £2 of income above £150,000, down to a minimum of £10,000 for those with an income of more than £210,000. This allowance has particularly impacted doctors and surgeons, due to their earnings and the complexities of the NHS Pension Scheme.
As a result of these restrictions, there has been an increased interest in alternative HMRC-approved tax-efficient investment schemes from investors who are already maximising core tax-efficient allowances, such as pensions and ISAs; investors are especially interested in Venture Capital Trusts (VCTs).
VCTs are a type of tax-efficient investment created by the Government in the mid-nineties to encourage investment into smaller UK companies that are either unquoted or traded on AIM (the London Stock Exchange’s junior market). Companies that qualify for VCT investment must meet a variety of criteria based around their size, age, activities and how the financing will be used.
VCTs are structured as investment companies with their shares listed on the London Stock Exchange. They invest in diversified portfolios of qualifying fledgling businesses which are selected by a professional management team. VCT managers are usually either private equity companies or, in the case of AIM-focused VCTs, often fund management firms with strong expertise in smaller company investment.
However, unlike other investment companies (such as investment trusts), VCT investing provides UK individual taxpayers with various tax incentives in recognition of the higher risks involved:
Up to £200,000 can be invested in VCTs by UK individual taxpayers each tax year, meaning a potential maximum Income Tax credit of £60,000 where all investments are made into new share issues.
VCTs are specialist investments and should be regarded as higher risk. The companies they invest in are typically innovative and exciting but they are also illiquid and early-stage. VCTs are therefore not suitable for novice investors, those who cannot tolerate the potential for losses or who do not have portfolios of other mainstream investments such as funds, main exchange listed companies and bonds. VCTs should only represent a modest part of an overall investment portfolio. As VCTs carry numerous tax incentives, they are not suitable for non-taxpayers; a typical VCT investor will be subject to the higher or additional rates of Income Tax. Please see the important information at the bottom of the page before investing.
Examples of people who might consider VCTs include:
There are a number of VCT offers currently engaged in new shares issues, each seeking only a limited amount of new cash from investors. In reviewing each VCT offer we consider their track record, the expertise and resources of the management team, how well diversified their existing portfolio is and other factors such as costs, their dividend policy and approach to share buybacks. We then award VCTs a star rating, with five being the highest possible. Currently, there are four offers which we have awarded five-star ratings: Amati AIM VCT, the Albion VCTs, the Mobeus VCTs and Octopus Titan VCT. For each of these we have published a detailed review.
For further information on VCT offers please visit our VCT centre. If you have any questions about VCTs and how we might be able to help, please call us on 020 7189 9999.
Please see our VCT section for more information about the risks of VCTs.
VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Historical or current yields should not be considered a reliable indicator of future returns, which cannot be guaranteed. 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.
We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice.