VCT tax relief: all the more valuable now?

The tax burden is now at its highest since 1949 – and rising. Once the additional tax changes announced in the Autumn Statement become effective, roughly a quarter of a million more taxpayers are expected to be dragged into the 45% top rate of tax, whilst those already caught will see their annual tax bill rise.

And, whereas in the past wealthier investors might have mitigated this with large pension contributions, that’s no longer possible for many. What alternatives are there?

Generous tax relief to support young British business

VCTs – with up to 30% income tax relief and tax-free dividends, plus a generous £200k allowance – are one of the last relatively simple and tax-efficient investment options left. Note, tax rules can change and benefits depend on circumstances. 

The fact VCT dividends are tax free could be of significant value, especially once the tax-free allowance for dividends is halved from April 2023 (and halved again from 2024).

If a VCT pays a 5% dividend, that means 5p in your hand for every £1. To match that, assuming the dividend allowance has already been used, a higher-rate taxpayer would have to get a taxable dividend of 7.55% (8.24% for a top-rate taxpayer).

Indeed, in a survey we carried out earlier this year – completed by over 1,300 VCT investors – 71.7% cited tax as a reason that prompted them to start investing in VCTs.

VCTs’ growing appeal

In addition to delivering valuable tax savings, VCTs have also historically generated strong returns for investors. 

You can see more details on individual VCTs’ performance in this newsletter. Please remember, past performance is not a guide to the future. 

VCTs have achieved this by backing the next generation of UK entrepreneurs. You can see some examples of the high-growth-potential VCT-backed companies in the pages that follow – from fraud-prevention big-data analytics firm Quantexa and Emmy Award-winning special effects creators Outpost VFX, to “ethical hacker”-powered cybersecurity platform Intigriti and preloved luxury handbag authenticator and marketplace Luxury Promise, specialising in a category of goods that can bring up to six-figure sums at auction houses Sotheby’s and Christie’s.

What to consider next?

There are currently over 20 VCT offers open for investment – another handful are expected to open in January. 

In this newsletter, you’ll find concise summaries of 12 current and upcoming VCT offers – including how they’ve performed and the kinds of companies they invest in. We have highlighted VCTs with the most investment merit in our view with a golden “W” – note this is not personal investment advice and you will have to form your own view.

Please bear in mind, though: VCTs are high risk, you should not invest money you cannot afford to lose. Each VCT offer has finite capacity: it targets a specific amount to raise and once that’s reached, it closes. Popular VCTs tend to fill quickly – in October, the Mobeus VCTs raised £45 million in the first 24 hours of the offer opening. So, if you see something you like, consider acting quickly.

Through Wealth Club, you can apply online for VCTs and benefit from market-leading discounts and in some cases an annual rebate of up to 0.15% for three years. 

Protect your ISA from inheritance tax

In this newsletter you will also find an article on how to protect your existing ISAs from inheritance tax. This could be relevant to investors who have built a significant ISA portfolio and are likely to be affected by inheritance tax. Doing nothing could lead to the ISA being eventually subject to a 40% tax charge. In our article we discuss an option experienced investors could consider. 

Charlie Huggins’s share portfolio launch 

You can learn more about our new share portfolio service, managed by Head of Equities Charlie Huggins. To be launched in the new year with a focus on growing long-term wealth, the portfolio will be available to Wealth Club members only. Charlie will be investing his own money, as will I.