Venture Capital Trusts: the boost your portfolio seeks?

Venture Capital Trusts (VCTs) have become popular not only among business owners and entrepreneurs looking to raise finance, but they have also become attractive propositions for high-net-worth individuals looking for tax-advantageous investments to boost their portfolios.

The UK has become one of the world’s most successful markets for entrepreneurial small companies and there’s no doubt that VCTs have played an important part in this. In the 2021-22 tax year, VCTs raised £1.13bn¹ to be invested in small and innovative UK companies.

VCTs have made more than 1,000 investments totalling £1.7bn into 530 small and medium-sized companies in the past five years²., which is testament to their increasing popularity.

VCTs explained

VCTs are investment funds designed to provide capital to small, unquoted companies and some quoted (such as on AIM) with high growth potential. VCTs were established in 1995 to encourage investment in early-stage firms which typically struggle to raise capital. The rationale is that their existence promotes innovation amongst the small higher-risk business community, which in turn drives up productivity, creates jobs and boosts economic growth.

VCTs typically target companies that have the potential to achieve high growth and generate significant returns for investors. However, such companies are typically at an early stage of development and therefore are considered high-risk investments.

A valuable supplement to your investment and retirement planning

Pensions tax relief has become less generous over the years. The recent Spring Budget included some changes relating to pensions, making them potentially more attractive from a tax and saving point of view depending on an individual’s personal circumstances.

The annual pension contribution allowance is increasing from £40,000 a year to £60,000 a year. Previously, high earners could only contribute a maximum of £4,000 a year and this is increasing to £10,000 a year.
The Budget is also abolishing the Lifetime Allowance, ending the restrictions on those trying to save for retirement.
The maximum tax-free lump sum an individual can take from their pension is limited to 25% of the current £1,073,100 Lifetime Allowance. However, individuals with protection arrangements in place may be entitled to take a larger tax-free lump sum.

Investors who are thinking about their long-term retirement plans should consider VCTs as complementary to existing pension arrangements.

VCT tax reliefs for investors

The main tax benefits of investing in a VCT include:

Income Tax relief – investors can claim upfront Income Tax relief of up to 30% on the amount invested in a VCT, subject to certain conditions. The investment must be in a new VCT (or new shares from an existing VCT), be held for five years, and the investment cannot exceed £200,000 per tax year.
Tax-free dividends – dividends paid by VCTs are generally tax free, this can be especially useful for income in retirement.
Capital Gains Tax (CGT) exemption – any capital gains made on the sale of VCT shares are generally exempt from Capital Gains Tax, provided that the investor has held the shares for at least five years.

VCTs explained

A valuable supplement to your investment and retirement planning

VCT tax reliefs for investors

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