How VCTs can play a role in retirement planning

An investor’s tax treatment will depend on their individual circumstances and tax legislation is always subject to change. The available tax reliefs also depend on the VCT maintaining its qualifying status. 

Another record breaking year for VCTs

According to the AIC, VCTs raised a staggering £542m in the last tax year. This was the second-highest fundraising year on record, and an increase of 18 per cent from the previous year. There is now a total of £3.9bn invested in the VCT market.

So what’s been driving inflows? Both pensions and property have come under increased scrutiny from a tax perspective in recent years, with property investing in the form of buy-to-let coming under particular pressure.

It is not hard to see that clients who have found themselves with a potential increased tax burden have started looking at complementary tax-efficient investments, particular those that can assist with retirement planning. 

Buy-to-let cooling down

Many people have opted to invest in bricks and mortar as a way to complement or even replace pension planning. However, a series of measures designed to alleviate housing market concerns − including a 3 per cent stamp duty surcharge on the purchase of buy-to-let properties and second homes and, more recently, the phased reduction in tax relief on mortgage interest – has made this less tax-efficient. 

Previously, landlords could deduct 100 per cent of their mortgage interest and other finance-related costs from rental income, thereby reducing their overall tax liability. To replace mortgage interest relief, landlords will be granted a 20 per cent basic rate tax relief which can be used to offset income tax.

Unfortunately, this is likely to push many property owners who were paying income tax at the basic rate into the higher rate tax bracket, despite their income from the property staying the same. It’s no surprise, therefore that increasing numbers of investors may be looking for ways to reduce their tax burden.

Pension limits are restricting investors

Another reason why VCTs are increasing in popularity is that many high earners, particularly those getting closer to retirement age, have begun to feel far more constricted as to how much they can put into their pension. Changes to the lifetime allowance have helped a large number of investors to start looking at VCTs in a new light, as a means of complementing existing retirement planning strategies. 

Advisers have been tell us that a growing number of clients are interested in exploring how a VCT can complement their existing pension arrangements.