With more of our clients finding that their capacity to invest in Pensions is limited either by the Tapered Annual Allowance or because they are nearing the Lifetime Allowance, they are coming to us for advice on the alternatives to pensions.
A viable alternative is a Venture Capital Trust (VCT). These were introduced in 1995 and had attractive tax treatment as a way of driving investment into smaller UK companies. There is 30% Income Tax relief on investments into VCTs if the investments are held for five years, and any dividends are paid tax-free, as well as profits being free of Capital Gains Tax. So that is three Pro’s to start with!
There is no secondary market for VCTs as there is no tax relief for someone who buys your VCT shares from you. For this reason, they should be seen as a longer-term hold, until the VCT manager itself buys the shares back from you. This will certainly be at a discount to their true value, and you should look at the buyback terms and conditions before investing.
Whilst I have said that VCTs can only invest in smaller companies, the limits are gross assets of £15M or less and 250 employees or less, so we are not always talking about Joe Bloggs setting up in his backroom. Some household names like Zoopla, Gousto, Virgin Wines, Everyman Cinemas, Graze and Cazoo have been backed by VCT investment.
VCTs have great tax advantages but beware of the adage ‘don’t let the tax tail wag the investment dog.’ As part of an overall portfolio of pensions, ISAs, emergency funds, a VCT could be a good addition, but it is certainly not for a first-time investor who has not maxed out the other lower-risk opportunities.
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If you have any thoughts or comments on this article, “Venture Capital Trusts: The Pros and Cons of VCT’s.”, then we would love to hear from you.