Inheritance Tax  

Investors turning to VCTs for inheritance plans

Investors turning to VCTs for inheritance plans

Venture capital trusts' steady income streams mean they are being increasingly used for intergenerational wealth planning despite their lack of inheritance tax benefits, David Hall has said. 

Mr Hall, managing director at YFM Equity Partners, said more investors in the firm's VCTs and private equity funds had been looking to use the vehicles as a means of inheritance planning. 

He said: "Some of the things our investors have been doing in terms of using VCTs and private equity vehicles as part of their intergenerational planning are quite interesting.

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"We surveyed our investors about their plans for their VCT shares, largely because a significant proportion of our investors had held their shares for more than 10 years - some for 15 years - and had started investing in their late 50s and early 60s. 

"Some five per cent or so of our investors at the time were over 80, so we wanted to know their plans. We needed to know whether we had enough money for buy-backs, for example, so the survey aimed to find out their intentions so we could plan.

"To our surprise, 32 per cent said they wanted to pass on their shareholdings to the next generation, either children or grandchildren."

He said this was notable, as VCTs themselves are not inheritance tax efficient, as they form part of an investor's estate.

But he said the rationale was that VCTs pay good, tax-free dividends, which were fairly consistent and relatively good. 

"Anecdotally", Mr Hall added, "One person scribbled on the survey 'under no circumstances should my descendants sell these shares'. 

"Almost all asked us how to go about passing the VCTs onto the next generation, and our response was that they should talk to their financial adviser."

According to Mr Hall, the average investor has put between £20,000 and £30,000 in aggregate across YFM VCTs. Even though the sums invested are not large, investors were still keen to make sure subsequent generations benefited from the tax-free dividend income.

Even though base dividends may have dropped a little since the rules over payout taxation were changed in 2015, there is usually a special dividend payout from the types of companies VCTs invest in, which helps to boost the tax-free income. 

"This is cementing in people's minds that these are good investments. When you consider the low-interest-rate environment we have had for such a long time, shareholders consider these as investments worth hanging onto", Mr Hall said.

At the higher-net-worth end of the scale, in YFM's private equity funds, many of the investors are specifically investing in vehicles that will be for the benefit of the next generation and the one after that. 

Mr Hall added: "Because of the nature of PE investors, who describe themselves as Generation 1 or Generation 2 that have either made their fortune or are inheriting it, they have a lot of wealth sitting in these funds.

"PE funds by nature have a three- to four-year deployment period investing into good companies, and then with the holding and eventual divestment, you could hold these shares for up to a 10-year period.