APRIL last year saw the introduction of the tapered annual allowance on pension contributions, an advent that effectively means anyone earning over £150,000 per annum cannot contribute more than £10,000 each year into a registered pension scheme (including employer contributions) and receive tax relief.
At the same time, separate legislation also restricts the amount an individual can accrue within a pension arrangement, without a penal tax charge applying on the excess. Whilst such rules will only affect the ‘lucky’ few (although those in some defined benefit/occupational schemes may be surprised as to the actual worth of these arrangements), it is perhaps worth them considering an alternative form of investment for any funds they have available for investment.
Venture Capital Trusts (VCTs) are publicly listed companies which aim to make money by themselves investing in small, unquoted and entrepreneurial companies and in return for which, an investor receives various attractive tax breaks.
Such valuable tax breaks include:
– Up to 30 per cent income tax relief on investment amounts up to £200,000 in any single tax year (subject to holding the VCT shares for at least five years)
– Tax free dividends (many VCTs aim to pay dividend yields in the region of five per cent p.a.)
– Tax free growth (no capital gains tax payable on the disposal of shares)
– No reporting requirements on any dividends received (similar to ISAs)
As with Individual Savings Accounts (ISAs), you are able to invest in such as a single, one-off investment, or could look to do so each tax year as part of a structured plan.
It is worth pointing out that you receive the tax reliefs referred to in order to incentivise you to invest in what are often, early-phase or unquoted companies, and therefore these should be considered as being of a much higher risk profile than pensions or ISAs, or other more conventional forms of investment. That said, the generous tax breaks (uniquely) on both investments going in and any income paid out, along with the likely low correlation of the underlying investments within these compared with others that you may hold, can potentially make these structures a useful part of a well balanced and tax efficient portfolio.
Should you wish to discuss the potential use or benefit of investing in VCTs for your own individual circumstances, Peter Brydon can be contacted on 01604 621421 or by email at pbrydon@caves.co.uk
As with all investments, the value and income from them can fall as well as rise so you may get back less than you invest. Past performance is not a reliable indicator of future results. This risk is much greater with VCTs than with other stockmarket investments however, because they invest in small companies. Such companies are generally more volatile and likely to fail than their larger counterparts. For this reason, VCT investments are long-term investments and are not for everyone. They are for investors who have no need for immediate liquidity and can withstand a potential total loss. In addition, VCTs are less liquid than other stockmarket investments, i.e. they may be harder to sell. To retain all the tax reliefs available, you must hold the investment for at least five years and the companies must retain their qualifying status. Otherwise, you may have to pay back the income tax relief you have received. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practise as at (12/5/17). You are recommended to seek competent professional advice before taking any action.
Cave & sons Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 143715.
