VCT guide

48 49 CASE STUDIES CASE STUDIES 2 Client looking to extract money from a business tax-efficiently Tanya is looking to be more tax-efficient with the funds she withdraws from her company. She is a sophisticated investor with both a high capacity for loss and high attitude to risk. She has experience of investing in small start-up companies. Tanya runs her own clothing company and draws a salary of £12,500 per year tax-free* *within the personal allowance Dividend, of which: £80,000 Dividend allowance £2,000 (Higher rate of 32.5%= £13,812.50) £42,500 (Basic rate of 7.5%= £2,662.50) £35,500 Next Remaining Adviser recommends VCT investments to get the benefits of investing money withdrawn from a small business into a VCT £80,000 dividend paid out with part used as income and part placed into savings account £63,525 Remaining after tax in addition to Tanya’s £12,500 tax-free salary £16,475 Dividend tax due on the initial £80,000 extracted £80,000 dividend paid out with part used as income and part placed into VCT investment £80,000 (£80,000 withdrawn - £16,475 dividend tax + £54,917 net VCT investment + £8,608 remaining cash + £16,475 tax reclaim) Remaining after tax can be used to provide immediate income in addition to Tanya’s £12,500 tax-free salary £16,475 Dividend tax due on the initial £80,000 extracted £16,475 30% tax relief on VCT used to reclaim dividend tax The tax benefits of investing money withdrawn from a small business into a VCT The diagram below illustrates how Tanya could use the money withdrawn from her company to invest in a VCT during the 2019/20 tax year. There are two versions depending on whether Tanya invests her net dividend into a savings account or whether she uses some of the dividend to invest into a VCT £8,608 Remaining in cash after payment of dividend tax and VCT investment to generate tax relief equal to the dividend tax £54,917 Invested in a VCT VCT