Venture capital trusts cannot be considered a like-for-like alternative to a pension, an expert has warned, as more savers have been putting their money into the products due to the narrowing of other tax efficient investment routes.
The amount of money invested in VCTs has increased sharply over the past decade, increasing by 374 per cent from £154m in the 2008/09 tax year to £731m in 2018/19.
It has also seen a steep rise in the two years gone — from £542m in 2016/17 to £728m for 2017/18 - before flattening out at £731m in 2018/19.
VCTs are like investment trusts but only invest in small, young and typically unlisted companies.
Although such companies are riskier and statistically more likely to go bust, investing in a VCT comes with a 30 per cent income tax relief from the government and any returns are tax free.
The trusts have performed well in recent years — the top 16 VCTs have all at least doubled investors’ money on a net asset value return basis over the last 10 years while 2018 had the second biggest VCT season on record, according to data from the AIC.
Many put the rise in popularity of VCTs down to the cuts to the pension allowances and restrictions on buy-to-let investing which has resulted in VCTs being one of the few tax efficient investment avenues left for wealthier investors.
In 2014 the government reduced the pension annual allowance from £50,000 to £40,000 — leaving wealthy investors with £10,000 extra to invest elsewhere — while the tapered annual allowance, which gradually reduces the allowance for those on high incomes, was introduced in 2016.
Buy-to-let investing also took a hit with the introduction of an additional 3 per cent stamp duty surcharge on second homes in April 2016 which was closely followed by cuts to mortgage interest tax relief.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, said: “VCTs offer a highly tax-efficient way to invest. The popularity of the trusts has grown significantly in recent years.
“The restrictions on pension investments and the taper down in contribution allowances have been big drivers in the increasing investment in VCTs.”
But Jason Hollands, director at Tilney, said VCTs “cannot be considered a like for like alternative to a pension”.
Mr Hollands said he was a “big fan” of the products but that any investment into VCTs should be measured and proportionate to the investor’s overall portfolio, their appetite for risk and ability to tie their money up for the medium to longer term.
He added: “The tax features on VCTs are attractive — though not as generous as a pension for a higher or additional rate taxpayer — but these exist for a reason.
“The tax perks are provided by the government to incentivise investors for the risks involved when investing in the types of fledgling enterprises that VCTs are focused on and that the policy makers wish to support.”