Clients will typically be in their accumulation phase for twenty to thirty years. High-earning clients could spend around half of this period making enough in income to use up their pension and ISA allowances, or worried about exceeding the lifetime allowance.
That’s ten to fifteen years during which such clients could benefit from making regular VCT investments, which represent another tax-efficient way to invest for retirement. VCTs have a very different risk profile to the type of investments that typically go into an ISA, which makes VCTs a way of diversifying a client’s portfolio into an area of equity investing unlikely to be covered by their other investments.
Multiply that by the growing number of clients affected by the lifetime allowance, and you can see why an adviser who previously didn’t consider VCTs worth their time might now decide to research them.
Understanding the risks
The first step with any client is to make sure they understand the risks before making any investment. VCTs are high risk investments. The value of a VCT investment, and income from it, can fall as well as rise. Investors may not get back the full amount they invest.
Tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its VCT-qualifying status.
Clients will also need to be comfortable with the idea of holding the shares for five years in order to keep any income tax relief they claim. And they should keep in mind that VCT share prices can be volatile, and the shares may be hard to sell.
Tune in to The Tax Planning Show
The Tax Planning Show focuses on tax planning opportunities for a variety of clients. The event covers how VCTs could help your clients, as well as how you can help clients plan for inheritance tax.
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Jessica Franks, Head of Tax
VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: September 2020. CAM010135.
For professional advisers and paraplanners only. Not to be relied upon by retail investors.