VCT guide

31 INTERACTION WITH PENSIONS AND OTHER WRAPPERS VCT income tax relief interaction with other investments VCT income tax relief is limited to an amount that reduces an investor’s income tax liability to NIL. Advisers and clients should be aware that the amount of VCT income tax relief that the investor can claim could be reduced by any other transaction that effectively benefits from income tax relief, such as a Gift Aid payment. This is because, certain transactions, including Gift Aid payments to charities, for example, are treated as having been made after deduction of income tax. As a result, HMRC requires the donor to have paid enough income tax or CGT in that year to cover the tax the charity can claim from HMRC. In this scenario, if VCT income tax relief is used to reduce a client’s income tax bill to NIL for a year in which that investor has no CGT liability but has made Gift Aid donations, the client may Interaction with pensions and other wrappers have to pay an additional amount of income tax to cover the amount of tax reclaimed for the year by all the charities to which the client has made Gift Aid donations. Generally speaking, VCT income tax relief is given before EIS income tax relief and tax advice should be taken as to optimising any claims made (for example, EIS relief could potentially be carried back to a prior year, leaving just VCT income tax relief in consideration for a particular year). VCTs and ISAs Some VCT providers offer VCT investment via an ISA, whereby an investor could choose to transfer their existing ISA to a VCT ISA (so no new cash investment is needed to fund the investment and the investor can still benefit from 30% VCT income tax relief on the investment, subject to the permitted maximum). While there would be no change to the tax position on dividends for those who subscribe to the VCT within the annual permitted maximum (currently £200,000), it would theoretically enable an investor to subscribe more than the VCT annual maximum and receive tax-free dividends on the additional level of the investment held within the ISA. However, as mentioned, an investor is only able to claim tax relief on up to £200,000 invested in a VCT in any single tax year. VCTs and pensions An investor may wish to use a VCT to complement existing pension and retirement planning strategies. However, it should be remembered that a VCT (which invests in what most would classify as high-risk companies) should NOT be considered as a replacement for pension investments, which will typically be lower risk. Additional rate tax-payers (those who earn more than £150,000 per year) have their annual pension allowances reduced by £1 for every £2 extra income earned. For those earning over £210,000, their annual pension allowance is capped at £10,000. If an investor exceeds the annual allowance in a year, they won’t receive tax relief on any contributions that exceed the limit and will be faced with an annual allowance charge. High earners may be concerned that they can’t get enough money into their pension as a result of this restriction. In this situation, an investment into a VCT alongside the pension could provide an appropriate longer-term and tax-efficient investment. ANNUAL PENSION CONTRIBUTIONS ALLOWANCE £150,000 £154,000 £158,000 £162,000 £166,000 £170,000 £174,000 £178,000 £182,000 £186,000 £190,000 £194,000 £198,000 £202,000 £206,000 £210,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000 £0 Pension contributions Annual salary * However, where an investor disposes of an asset that would give rise to a capital gain, and reinvests all or part of the gain in shares which qualify for SEIS income tax relief, 50% of the gain reinvested will be exempt from CGT. ISA Pension VCT EIS SEIS ANNUAL MAX £20,000 £40,000 £200,000 £1m (£2m for KICs) £100,000 LIFETIME MAX x £1.055m x x x INCOME TAX RELIEF x √ 30% 30% 50% POTENTIAL FOR LOSS RELIEF x x x √ √ POTENTIAL FOR IHT RELIEF x only available for AIM it depends x √ √ CGT FREE GROWTH √ √ √ √ √ CGT DEFERRAL x x x √ x* TAX TREATMENT OF INCOME No further tax to pay for higher rate taxpayers; Interest: tax-free. No further tax to pay for higher rate taxpayers; Interest: tax-free – but only in roll-up phase; Payouts from annuity or drawdown will be taxable. Dividends within £200k annual maximum subscription: tax-free. Dividends: taxable. Dividends: taxable. TAX-FREE LUMP SUM √ 25% √ √ √ TAX WRAPPER OPTIONS SUMMARY