You’re undoubtedly well acquainted with the tax efficiency of ISAs and pensions, but are there any lesser known tax savvy investment options out there that could suit some doctors and dentists?
If you’ve already used your ISA and capital gains allowances, and you’re projected to fly by your annual and lifetime pension allowance limits, how else can you ease the tax bill and potentially increase your future wealth?
If you have the appetite to tolerate higher risk investments, Venture Capital Trusts (VCTs) are one option worth more than a cursory glance.
Venture Capital Trusts (VCTs): The basics
By investing in newly issued VCTs you will get income tax relief that currently stands at 30% on investments of up to £200,000 per tax year. This relief:
- Is provided as a tax credit to set against your total income tax liability;
- Cannot exceed your total tax liability for the tax year;
- Is not available if you buy existing Venture Capital Trust shares.
Investments in VCTs carry tax relief to encourage you to invest in smaller, higher risk companies. By pooling investors’ money (under very strict investment guidelines I might add), they allow that higher risk to be spread over a number of companies.
Are VCTs too good to be true?
VCTs invest in startup companies. Obviously not all investments are successful, but Zoopla and Hidden Escapes are two examples you might be aware of that started with venture capital investment.
Of course, by the very nature of the beast, not all small companies go onto greatness and even if they do, it may not be while you are investing in them. If they were all ‘dead certs’ then there would be no risk and everyone would be investing in them.
So that’s the crux of the matter. Venture capital trusts aren’t certain. They do carry risk. If you can’t sleep at night with that then they aren’t for you.
But, the Government recognises the importance of investing in these sorts of companies and so are happy to allow considerable tax benefits to those who do invest in them.
Exactly how risky are VCTs?
Although VCTs are an interesting addition to an investment portfolio, it is important to fully consider the risks. They are high risk investments and it is highly recommended that you seek independent advice before taking action.
Even though there are real tax advantages to investing in VCTs, it is important to go in with your eyes open. Your capital is at risk, your investment may fall as well as rise, and you might not get back what you put in.
How easy is it to sell your VCT investments?
Although you can theoretically sell VCTs, this is not recommended. It may be hard to find a buyer and you may find them illiquid. You should be prepared to invest in VCTs for at least 5 years. If you sell within 5 years, you will lose the tax relief.
What else do you need to consider before investing in VCTs?
Not all VCTs will suit you, not all VCTs are the same, and your appetite for risk is a vital characteristic of your investment.
Investment strategies incorporating VCTs can also be more complex, and the charges for VCTs are often higher and harder to understand than for other investments.
Should you be considering VCTs as an investment option?
We are all bemused by the absurd returns offered by funds held on deposit! Couple that with the old adage about death and taxes being the only certainties in life, then you may find it worth at least exploring the VCT option.
If you’re keen to reduce your tax bill, are happy to take on a higher level of risk, and are prepared to invest for at least 5 years, you might want to add VCTs to your balanced financial portfolio.
If nothing else, consider a VCT investment for these 5 reasons:
1. You’ll get 30% tax relief on your investment. That’s £3,000 for every £10,000 invested.
2. Any growth in your investment will be tax free.
3. Any dividend payments you get are tax free and can supplement your income.
4. VCTs diversify your existing investment portfolio.
5. You’ll be investing in companies “looking to genuinely enhance the UK economy”.
Ways VCTs can enhance your financial plan
VCTs can be useful in different ways. For example, are you a landlord paying higher rate tax on rental income from buy-to-let properties? You can’t pension this income, but you could use VCTs as a way of accessing income tax relief.
Whilst there are plenty of providers offering a wide range of investment options, VCTs may not be available all year round. Fundraising is done in tranches, so plans open and close to new investment throughout the year.
As always, speak to your financial adviser before making any investment decisions and remember, tax levels and reliefs may change, and the availability of tax reliefs will depend on your individual circumstances.
Would you consider adding venture capital trusts to your investment portfolio? Let us know by adding a comment below.