There’s good reason to expect demand for Venture Capital Trusts (VCTs) to be high this year. Fundraise capacities are limited and in our own experience, the Octopus AIM VCT £40 million fundraise filled in just three weeks in September. So it makes sense to be proactive for VCT season to avoid disappointed clients and missed opportunities.
If you’re in any doubt about why VCTs should have your attention over the coming weeks and months, here are three reasons you should be on the front foot.
1. Key drivers of demand haven’t gone away
The amount of income tax paid has doubled in the last 20 years1. This includes an additional 440,000 additional rate taxpayers in 2021-22 alone. With the higher-rate tax threshold frozen until at least 2026, the number of higher-rate taxpayers is set to grow further. Advisers will want to make sure their clients are making full use of their available tax allowances. For suitable clients, that might mean considering a VCT.
VCTs are pooled investments which incentivise investors to support early-stage companies by offering a range of tax benefits. They have become more popular with advisers to complement a client’s wider investment portfolio. What’s more, they offer attractive tax reliefs on investments up to £200,000 each year. VCT investors can claim up to 30% upfront income tax relief, provided they hold the investment for five years. And there’s no tax to pay on any dividends received, meaning investors can target a tax-free income stream. These tax reliefs exist to compensate investors for some of the additional risk they take by investing in small companies. Therefore, where a suitable client has maxed their pension and ISA investments for the year, and has an income tax liability, a VCT can be an additional way to invest tax-efficiently.
It’s a similar story with another important driver for VCT investments, the annual pension allowance. This limits the amount an investor can put into their pension on a yearly basis. For most people it sits at £40,000, but for higher earners, earning over £240,000 it can be reduced to £10,000 and in some cases tapered even further down to £4,000. The latest data available from HMRC shows the numbers breaching their annual allowance is trending upwards, up 15% year on year in 2018-19.2
Another pension cap to think about is the lifetime allowance (LTA), which is a cap on the tax-privileged pension funds a client can build up over their lifetime. HMRC have seen uptick of 6% between 2018-2019 on the tax paid by those exceeding this allowance.2 This allowance is also frozen at current levels until at least 2026.
Once a client expects to hit or exceed their annual or lifetime allowances, a VCT can become an attractive way to complement their investments. It’s an investment that can be accessed, subject to liquidity, ahead of a pension. And it offers the possibility of tax-free income.
2. You might have new planning opportunities to explore
These are the common scenarios we see, but other tax squeezes have driven advisers to identify clients in other situations where a VCT can help.
Take clients who own a business. Given the changes to dividend taxation, the effective rate at which dividends are taxed has increased for most, and that means that business owners who pay themselves through dividends could face higher tax bills and lower take-home earnings. VCTs could be a way to offset these costs and help to extract money from a business tax efficiently.