Maximising Tax Efficiency with Venture Capital Trusts (VCTs)

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    Tax planning can be complicated for investors and their advisers at the best of times, let alone when there are rule changes to contend with. Tax reliefs continually shift, with recent changes to pensions allowances, and further reductions also imminent to capital gains and dividend tax allowances as 5 April approaches. Whilst maximising pension and ISA contributions will typically be the first port of call for many investors, Venture Capital Trusts (VCTs) remain one of the most attractive tax-efficient options available for investors. Steven Ford, Head of Marketing at Maven, sets out the tax reliefs they offer for qualifying investors.

    Published: Feb 26, 2024
    Focus: Growth Capital

    Venture Capital Trusts (VCTs): An Attractive Tax-Efficient Option

    VCTs are designed to encourage investment into ambitious, emerging UK companies that may struggle to raise finance from banks and other mainstream funding sources, helping to stimulate job creation, drive innovation and promote economic growth. 

    Investors should of course remember the popular adage ‘don’t let the tax tail wag the investment dog’, as investment into VCTs does generally represent a higher risk than some other investments so must suit their wider objectives. By their nature, smaller companies are higher risk investments than larger, established businesses as they are at an earlier stage in their growth, so VCTs offer generous tax reliefs to incentivise investments by individuals of up to £200,000 per tax year in new VCT shares.

    But what are all the available tax benefits? 

    Initial Income Tax Relief

    Investors can benefit from up to 30% income tax relief on investments in new VCT shares, regardless of whether they pay basic, higher or additional rate tax, provided that they have sufficient income tax liability for that year and that the new shares are held for at least five years after their issue. The investor can claim the relief through their tax return or, if they have invested earlier in the tax year, may wish to ask HMRC to apply the VCT tax relief through an immediate adjustment to their tax code.

    Tax-free Dividends

    Dividends from VCT shares are paid tax-free. This can be a valuable option for investors looking to build additional income streams as part of their portfolio or retirement planning, particularly in view of the further 50% reduction in the general Dividend Allowance taking effect from 6 April 2024 and potentially impacting their income from other investments. However, investors should be aware that dividends from VCT shares are not guaranteed.

    Exemption from Capital Gains Tax

    Any gain made by an investor on the sale of VCT shares is exempt from capital gains tax (CGT), which can provide an attractive alternative for investors faced with an increased CGT burden on assets such as shares and property after April 2024, following a halving of the CGT Allowance in consecutive years.

    Further details about the VCT scheme and the tax reliefs available can be found at GOV.UK.

     

    VCTs: More Than a Simple Tax Option

    Whilst these tax advantages make VCTs an attractive option for high earners looking for ways to reduce their tax liability, tax treatment depends on individual circumstances and may be subject to change, so it is always recommended to seek professional advice before making investment decisions.

    It is also important to remember that VCTs are more than a one trick pony or simple tax option. They can provide investors with an attractive, complementary asset in building their portfolios, offering the potential for regular tax-free income and capital growth through access to large, expertly researched portfolios of emerging businesses in some of the UK’s most vibrant and cutting edge sectors.

     

    The Maven VCT offers are currently open for new investment for the 2023/24 and 2024/25 tax years. Find out more here. 

    Posted in:
    Growth Capital