VCT guide

50 CASE STUDIES 3 A married couple with regular income and assets Peter and Valerie have been married for 25 years and they plan on retiring in 10 years’ time. Peter is a higher rate taxpayer and has a good level of pension provision. Valerie, on the other hand, doesn’t have a significant pension pot but does have a residential property which she lets out. She has always seen this as being ‘her pension’ and she doesn’t wish to sell the property and be left with a large CGT bill. Valerie earns £30,000 of net rental income and has other income up to her personal allowance. She expects to pay £6,000 income tax this year (20% x £30,000). The initial income tax relief Valerie receives on her VCT investment (£6,000) would eliminate the £6,000 annual income tax she’s required to pay on her rental income. VCT shares must be held for at least five years in order to continue to qualify for the initial income tax relief (should Valerie sell the shares before the end of five years, she’d have to repay the income tax relief to HMRC). 51 CASE STUDIES After six years, Valerie has claimed £36,000 income tax relief from a total £120,000 investment. It is worth noting however that, under current rules, after selling shares in a VCT it is not possible to claim tax relief on new shares bought in the same VCT within six months of the initial sale. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 VCT Investment £20K £20K £20K £20K £20K £20K £20K £20K Cumulative investment £20K £40K £60K £80K £100K 30% income tax relief £6K £6K £6K £6K £6K £6K £6K £6K Cumulative income tax relief £6K £12K £18K £24K £30K £36K £42K £48K The following diagram illustrates how Valerie could claim income tax relief on a series of VCT investments over several consecutive tax years. The illustration shows a period of eight years as an example, but Valerie could use this method to keep investing and claiming income tax relief indefinitely, subject to the rules remaining the same and certain conditions. Tax benefits of investing annually into a VCT £Reinvest = FOR SALE 6 YR 5 YR Valerie doesn’t have a significant pension pot but owns a residential property she lets out earning £30,000 income TO LET Following discussions with her IFA, Valerie plans on investing £20,000 annually into VCTs for the next five years per year for the next five years £20,000 p.a. £6,000 VCT