Pensions have seen their tax-efficient limits severely restricted over time. The Lifetime Allowance, the maximum value your pension savings can be before additional tax is liable, used to be £1.8 million. Today, it’s £1.03 million, rising marginally to £1.055 in April.
If you’ve utilised your Lifetime Allowance, an increasingly popular alternative retirement savings option is a Venture Capital Trust (VCT). They are investment companies listed on the London Stock Exchange, set up to invest in small UK businesses that meet particular criteria. Potentially higher risk by their nature, they can offer higher rewards. VCT tax relief is also generous, designed to encourage investment in young businesses. They attract 30% initial Income Tax relief up to £200,000 every year, dividends are paid free of Income Tax, and returns do not attract Capital Gains Tax.
First come, first served
The issue is that VCTs are limited in their capacity to take on investment and currently, in some circumstances, demand is outstripping supply. Thanks in part to recent changes in the type of companies which the funds can invest, some VCT managers are filling their capacity well before the end of the tax year.
Figures from the Association of Investment Companies show that VCT fundraising for 2017/18 was close to an all-time high, raising £728 million. That’s the second highest investment since VCTs were introduced in 1995 and an increase of 34% on last year’s figure of £542 million. It is also the highest amount ever raised at the current level of 30% Income Tax relief.
According to data from HMRC, VCTs have raised an impressive £7.7 billion of funds since inception. You might assume that this level of interest would encourage competition and new entrants to the market. However, the number managing funds actually fell from 75, in 2016/17, to 70 in 2017/18.
The tax advantages are also evident; in 2016/17, 15,120 investors claimed £500 million of Income Tax relief on their investment, a 15% increase compared to 2015/16. As part of a diversified, risk aligned portfolio, a VCT really can provide an opportunity for tax-efficient growth, whilst helping to fund UK start-up businesses and the wider economy.
Don’t wait until April
It’s not unusual for investors to leave contributions to the last minute in a tax year. But, the competition to secure a VCT investment is so strong they may struggle to find an appropriate opportunity with available capacity. There are alternatives, such as an Enterprise Investment Scheme (EIS) which have similar tax advantages, but they are more complex and don’t provide a liquid market for exiting the investment, as returns only occur as portfolio companies are sold.
Leaving your ISA contribution to the last minute isn’t ideal, you may have missed growth opportunities and compounding growth over time. But, ISA availability isn’t limited like a VCT, so you are always able to make use of that tax-allowance at the eleventh hour.
It’s also important to remember that you can’t carry forward any unused VCT tax-relief to the following year. It really is a use it or lose it situation, so planning in advance is essential.
As Chartered Financial Planners, we make sure that your money is working hard to help you achieve all you want from life. We call this ‘money with a purpose’ and often that purpose will be to fund a comfortable retirement. Depending on your objectives, aspirations and current pension provision, a VCT could help to secure that. But as we’ve demonstrated, a lack of capacity could hinder your plans if you leave it too late. Act now, call today if you’d like more information on this opportunity.