For professional advisers and paraplanners only. Not to be relied upon by retail investors.
It’s worth spending the time to research Venture Capital Trusts, says Jessica Franks, Head of Tax, Octopus Investments.
Advising on Venture Capital Trusts (VCTs) is a good way to provide high-earning clients with a full service.
If a client has additional amounts to invest above their pension and ISA allowances, you’ll naturally look to make most of other allowances and reliefs. That’s where VCTs often come into the conversation.
VCTs can also help you grow your business as well as adding value to client planning. They may even help you win new clients. Accountants, for example, may be more inclined to refer high-earning clients to an adviser who can offer advice on a broad range of investments, including tax-efficient investments like VCTs.
An important part of an adviser’s proposition
VCTs give clients access to a portfolio of early-stage companies with high growth potential, while also enabling them to claim upfront income tax relief (worth 30% of the amount invested, up to an investment of £200,000) and earn tax-free dividends and capital gains.
Not so long ago, it was common for an adviser to recommend a VCT to just one or two of their clients. The typical case size would be around £25,000 to £30,000.
That’s not a huge amount of business in and of itself, but it’s part of providing a full service for high-earning clients, who like the fact that they can claim upfront income tax relief. For some advisers, though, the time spent researching what was then a very niche part of the investment universe was not justified by the amount of business they could expect to recommend.
But times have changed. Today, we work with advisers who will have ten, fifteen or even twenty clients invested in VCTs. These clients are high earners, and tend to make frequent VCT investments. Over the years, this can add up to a sizeable amount of business.
Why VCTs are popular
A VCT investment can be a powerful tax planning tool for investors in many different situations. Tax-free dividends represent the potential to provide a useful income stream, while exposure to the type of growth company VCTs invest in can complement other areas of a client’s portfolio.
Restrictions on pension contributions have left many clients looking for additional tax-efficient ways to invest towards their retirement. While it’s true that fewer clients will be affected by the annual allowance after the threshold and adjusted income limits were raised last year, those that are, face a lower tapered annual allowance.
Of relevance to more clients is the lifetime pension allowance, which appears to have been a motivation behind a lot of VCT cases in recent years and is now frozen at current levels until at least April 2026. The lifetime allowance is set to remain a material constraint on tax-efficient pension saving for a lot of people. And of course, high earners who take advantage of any increase in their annual allowance can expect to find themselves butting up against the lifetime allowance sooner than they otherwise would have.
Clients will typically be in their accumulation phase for twenty to thirty years. High-earning clients could spend around half of this period making enough in income to use up their pension and ISA allowances, or worried about exceeding the lifetime allowance.
That’s ten to fifteen years during which such clients could benefit from making regular VCT investments, which represent another tax-efficient way to invest for retirement. VCTs have a very different risk profile to the type of investments that typically go into an ISA, which makes VCTs a way of diversifying a client’s portfolio into an area of equity investing unlikely to be covered by their other investments.
Multiply that by the growing number of clients affected by the lifetime allowance, and you can see why an adviser who previously didn’t consider VCTs worth their time might now decide to research them.
Understanding the risks
The first step with any client is to make sure they understand the risks before making any investment. VCTs are high risk investments. The value of a VCT investment, and income from it, can fall as well as rise. Investors may not get back the full amount they invest.
Tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its VCT-qualifying status.
Clients will also need to be comfortable with the idea of holding the shares for five years in order to keep any income tax relief they claim. And they should keep in mind that VCT share prices can be volatile, and the shares may be hard to sell.
Tune in to The Tax Planning Show
The Tax Planning Show focuses on tax planning opportunities for a variety of clients. The event covers how VCTs could help your clients, as well as how you can help clients plan for inheritance tax.
To watch on demand, register your details here.
You’ll get 90 minutes’ CPD for attending.
VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: September 2020. CAM010135.
