The rise of importance of VCTs

Reductions to pension allowances have led to retirees considering the other options at their disposal. As a result, the popularity of venture capital trusts (VCTs) continues to grow.

A highly tax-efficient vehicle, the VCT is fast becoming a viable alternative to traditional pensions – a fact reflected in HMRC’s most recent figures.

VCTs raised £435m in the last tax year – a comparable amount to 2014/15, and marginally down on 2013/14 – but the average amount raised per fundraising offer shot up by almost a third to £10.12m. Not since the turn of the millennium has the average scaled those heights. In the previous tax year, that £435m figure had been reached by 57 VCTs. This time around, the same amount was raised by just 43.

What is a venture capital trust?

Venture capital trusts, or VCTs, are tax-efficient investment schemes where money is invested in fledgling SMEs. These smaller businesses require equity to expand further and progress to the next level. Of course, investing in these companies present a higher level of risk, which is reflected in the numerous tax breaks and incentives available, including 30% income tax relief (provided the shares are held for five years) and tax-free dividend payments.

For those willing to embrace the higher risks in return for a potentially higher yield, the VCT can be an attractive alternative to traditional savings vehicles. It also encourages growth, creates more jobs and boosts the economy, generating social as well as literal capital.

The catalyst behind the rise

Most industry experts agree that the Government’s latest measures on pensions have forced higher earners to look for solutions elsewhere in the marketplace, and, should the legislation-tinkering continue, more high earners may go down a similar route.

The lifetime allowance (LTA) was as high as £1.8m in 2011, but that figure has dropped drastically ever since, coming down by £800,000 within five years. Any funds above the £1m cutoff point are subject to a Lifetime Allowance Charge – a potential 55% tax hit if taken as a lump sum.

Similarly, the annual allowance on pension savings has also dwindled, albeit over a longer period. Standing at £255,000 in 2010/11, the allowance was slashed to just £50,000 by George Osborne in the next Budget, then was brought down again by the Chancellor to £40,000 in 2014/15.

These recent moves, coupled with the endless speculation on the Government’s long-term intentions, have led more investors down the VCT path.

“VCTs are now coming of age and are moving into the mainstream as a major option for retirement planning, especially for high earners who risk reaching the £1 million LTA or are limited by the annual allowance,” Foresight Group director Hugi Clarke told Money Observer.

“VCTs are likely to become even more popular in coming years, as people look for alternative retirement options against a backdrop of constant legislative change in more traditional retirement methods.”

To find out more about venture capital trusts, or are considering investment alternatives as an additional source of income, get in touch with one of our advisers today.