Venture Capital Trusts for people with income tax problems

Posted on 27th December 2021

I haven’t written a blog for some time now, so I thought it was high time I did! I hope it is helpful and look out for more regular blogs on the site.

As we approach Q4 of the year (I can’t believe it’s already Q4 …), I wanted to post some information on Venture Capital Trust (VCT) Investing and why it is something you should be considering investing into each year, as a matter of course, if you are an additional rate taxpayer.

Essentially, by investing into a VCT you can save 30% in income tax on earned income on the amount you invest in that tax year. Where, you can invest between £10k & £200k in any one tax year.

The money should not be divested for 5 years, or you will lose the income tax relief.

During the 5 years, typically annually, you can also benefit from (discretionary, not guaranteed) from tax free dividends based as a percentage of the notional that you have invested.

So, for example:

If you invested £30k into a VCT in this tax year you would receive £9k off your income tax bill in this tax year, via self-assessment & adjustment of your tax code.

Then, if the VCT paid out say a 5% dividend each year, you would also receive an additional £1.5k each year for 5 years, tax free!

Best planning might be to invest an amount that is affordable each tax year for 5 years and benefit from the 30% income tax relief. Then after 5 years your first year’s £funds become available for you to reinvest and roll into year 6 and so forth. in this example, you are benefitting from income tax relief every year.

For additional rate taxpayers & high earners investing into a VCT should be part of your routine annual financial planning. If you aren’t doing it, you are missing out and paying the HMRC more than is required.

In case this has piqued your interest, here are some scenarios of when you might consider investing into a VCT:

– If you are an additional rate taxpayer, you have lost your personal allowance and in a worst-case scenario you have a fully tapered pension annual allowance of £4k p/a. This effectively means that as a high earner you are limited in terms of what you can save into your pension, probably just when you need to most. A complimentary way to invest for retirement, tax efficiently, as part of a diversified investment strategy, would be to invest into a VCT.

– If you are a higher or additional rate taxpayer, you max funded your pension and have reached the Life-Time-Allowance (LTA), then, a tax efficient alternative of saving into a pension could be to invest into a VCT.

– If you have exceeded the LTA allowance and you want to extract funds more than the LTA tax efficiently, you may consider investing those funds into a VCT to offset & reduce the unauthorised tax charge.

– If you are a landlord and you own properties, you may be able to offset some income tax on rental income by investing rental proceeds into a VCT.

– If you are a business owner, you could offset some or all the income tax on your dividends, by investing retained profits into a VCT.

If you have any questions about this and would like to find out more, please give me a call, I’m here to help, as always.

Risk warnings:

Venture Capital Trusts (VCT) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

 

Tax treatment varies according to individual circumstances and is subject to change.

 

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