Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

VCTs – investing in small companies with big tax breaks

Pensions give investors significant tax breaks but in recent years there has been a steady squeeze on the amount that can be saved into them, as the Government attempts to limit the costs of pension tax relief. The 2016/17 tax year has seen a reduction in the lifetime allowance – the amount that can be built up in a saver’s pension pot over and above which a hefty tax will apply – from £1.25 to £1 million. And for higher earners a complicated new annual allowance has been introduced, cutting the amount that can be invested to as little as £10,000.

Jason Hollands Jason Hollands
03 March 2017

A search for other tax-efficient investments

These changes have spurred an increasing number of savers to look beyond pensions at other forms of tax-efficient saving. For people who are subject to the higher rates of tax and have already used other accounts such as ISAs, Venture Capital Trusts (VCTs) can be an additional part of the tax-efficient investment toolkit worth considering.

VCTs are specialist investment companies, listed on the stock exchange, that invest in portfolios of unquoted or AIM-listed UK smaller companies that must meet various “qualifying investment” criteria set out by HMRC. As an incentive for the higher risks involved when investing in small, younger and illiquid companies, the Government gives VCT investors a number of generous tax reliefs.

30% Income Tax credit

Investments in a VCT new share issue attract a 30% Income Tax credit which is claimed through an investor’s annual self-assessment tax return. The investor must have paid the equivalent amount of tax being reclaimed, and importantly, they must then hold the VCT shares for at least five years. Otherwise they must repay the tax relief.  The maximum amount a UK resident taxpayer can invest in VCTs this tax year is £200,000, providing an Income Tax credit of up to £60,000.

Tax-free dividends and capital gains

Once invested in a VCT, investors will receive any dividends free of tax and they do not need to disclose VCT income on a tax return. Gains made on VCT shares by qualifying investors are also eligible for disposal relief, which makes them effectively exempt from Capital Gains Tax. The dividend yields on mature VCTs can be high, but are not guaranteed, and because they are tax-free they can be especially attractive to those subject to the higher rates of tax and who are comfortable with the risks involved.

Demand is high but supply is very scarce

While demand for VCT new share issues has been fuelled by the squeeze on pension allowances, supply of VCT share issues is very limited. VCTs will only raise cash that they are comfortable they can invest in businesses that meet the detailed criteria set out by HMRC.

Therefore VCT share issues each set a target amount of cash they are prepared to raise, and once reached the offer will close. Currently, VCT offers are filling up rapidly, and shares secured on a first come, first served basis so those wishing to invest in them should act quickly.

Our VCT reviews and discounts

At Bestinvest we have been researching VCTs since their inception in 1995. We are widely recognised as a leading specialist in this area. Before publishing our research and star ratings for each offer we conduct detailed due diligence including face-to-face meetings with the management teams. We can also cut the costs of investing in VCT share offers through the great discounts we have negotiated with the VCT groups. Find out more about the current VCT share offers that are open for investment and our reviews of these offers.

View VCT share offers and discounts

 

For more information on investing in VCTs, speak to our experts by calling 020 7189 2400 or emailing best@bestinvest.co.uk

Important information
VCTs should be regarded as higher risk investments. 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.