VCTs shine bright as pensions lose their lustre


Pension tax tinkering has led to record levels of venture capital trust (VCT) fundraising over the past tax year.

Paul Latham, managing director of Octopus Investments, said one of the main reasons for the recent popularity of VCTs has been successive years of tinkering with the tax treatment of pensions.

He said: "Pensions have had some constraints put on them over the past few years, with caps on the lifetime amount and the annual amount people can put in, and we have seen commensurate demands for VCTs over that time.

"Another one is the changes around buy-to-let, which means this is less attractive now than it was a year or so ago from a tax perspective, so again, people are now looking for alternatives."

According to data from wealth manager Tilney Group, VCTs brought in £695m during 2017 to 2018 in new share offers that launched during the past tax year. 

New fund raising was up 28 per cent from the £542m in the previous tax year, making 2017 to 2018 the second best year ever for VCT fund raising.

Jason Hollands, managing director of business development and communications, said: "This suggests £208m worth of income tax was saved by UK private investors at a time when higher earners have had their pension allowances squeezed by the tapered annual allowance."

Speaking to FTAdviser, Mr Latham suggested the UK could see similar levels of fundraising in the 2018 to 2019 tax year, although he cautioned this depended on the balance of supply and demand.

He said VCTs had also become a much more mainstream product over the past few years. Ten to 15 years ago, he explained, VCTs tended to be used by wealthy City workers putting big bonuses to work at the end of the tax year.

But Mr Latham said the majority of money is now coming from £5,000, £10,000 and £15,000 investments, meaning VCTs have become more mainstream and more widely understood and known, both by investors and financial advisers. 

He also said it was not possible to separate the tax incentives (30 per cent income tax relief) with the investment case for buying into British start-up businesses which are driving the UK economy.

Mr Latham said: "Investment in this part of the economy is clearly more risky, so it is not about tax versus investment; the tax break is really just supplementing the returns one gets from the investment class.

"This balances out the initial risk in that investment class – the two are intrinsically linked, and good for the economy."

Mr Latham also said Brexit uncertainty should not affect the VCT sector, particularly as the rules governing VCT investment are UK rules. 

"I don’t see there will be a significant change once the European Union oversight has gone away," he added.