A Venture Capital Trust (VCT) is a super tax-efficient investment which has surprisingly good tax breaks, especially for high earners who are higher rate (40%) and additional rate (45%) taxpayers.  Let’s re-cap on the main tax benefits of a VCT.

 

• Maximum investment limit £200,000
• Tax relief of up to 30% on investment
• Tax-free dividends
• Free of Capital Gains Tax on sale

 

Investment into a VCT generally involves investing in early stage companies so it is considered higher risk but such companies are listed companies meaning their shares are listed on a recognised stock exchange, usually the London Stock Exchange, so can be traded.  Such companies are usually smaller, high growth businesses.

 

 

So if you were to invest, say, £20,000 into a VCT you would get 30% tax relief, £6,000, on receipt of a tax certificate from the VCT quite soon after investing.  This tax certificate will allow you to claim the tax relief fairly quickly from HMRC especially if you invest near the end of the tax year on 5 April.

 

If you were to re-invest the £6,000 tax saved into a personal pension then you would save a further £3,000 Income Tax as a higher rate taxpayer (£3,375 as an additional rate taxpayer). £1,500 is deducted at source and a further £1,500 refunded either by a tax repayment or adjustment to your tax code.  That’s a tax saving of 45% for a higher rate taxpayer (£9,000/£20,000).

 

If you were to re-invest the gross contribution into your pension (£7,500) you would then generate £750 more in tax savings as a higher-rate taxpayer.  This would result in an overall tax saving of 48.75% (51.1% as an additional rate taxpayer).

 

If you were to invest in a VCT in an ISA you would still get the 30% Income Tax relief. Furthermore, every 5 years you could sell that VCT and re-invest in a new one and get a further 30% tax relief on the re-investment.  This is a useful strategy if you don’t have the spare cash in a bank account because you can invest the money from your ISA instead.  It also means that if you want to use up your £20,000 ISA allowance annually and invest £20,000 into a VCT you only need to invest £20,000 instead of £40,000.

 

According to the latest government statistics there was £687 billion invested in ISAS at the end of 2021 of which 42% were in Cash ISAs

https://www.gov.uk/government/statistics/annual-savings-statistics-2022/commentary-for-annual-savings-statistics-june-2022

 

At the time of writing the base rate is 5.25% and inflation is 4%, the average instant access Cash ISA account is only earning investors typically 2%-3% p.a.  That is a very poor return compared to a VCT investment in an ISA  which could potentially give you 30% Income Tax relief though it is of course a higher risk investment. So rather than leaving your Cash ISA to languish earning a low rate of interest, consider investing into a VCT within your ISA.

 

 

Tax relief on a VCT is allowed against all sources of taxable income.  It is given as a tax reducer against all of your Income Tax liabilities in a tax year as opposed to being given only against a specific source of income.

 

So if you want to maximise your tax savings then consider a combination of ISA, pension and VCT.  You know it makes sense.*

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.

VCT

Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you are unlikely to be protected if something goes wrong. VCTs are high-risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.