VCT guide

56 57 CASE STUDIES CASE STUDIES 6 Tax benefits of annually investing into a VCT James has an annual salary of £250,000 and maximises his ISA savings and pension contributions each year. He is interested in tax-efficient investments and using any annual allowances available to him. He is comfortable with the associated risks of investing in a VCT. VCT shares must be held for at least five years in order to continue to qualify for the initial income tax relief. James could sell his first VCT investment after the first five years, then reinvest the proceeds in another VCT. He could then use the further amount of income tax relief on his second VCT investment to reduce his year six income tax bill. Similarly, James’ year two VCT investment could be sold and reinvested in another VCT in year seven, giving him additional income tax relief, and so on. The illustration assumes no gain or loss on the investment (although it is common for VCT shares to be sold at a discount to NAV), and doesn’t take into account any initial or ongoing fees or costs associated with selling the VCT shares. It is worth noting however that, 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. ISA £250,000 annual salary Following discussions with his adviser, James plans on investing into VCT for the next few years Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 VCT Investment £50K £50K £50K £50K £50K £50K £50K £50K Cumulative investment £50K £100K £150K £200K £250K 30% income tax relief £15K £15K £15K £15K £15K £15K £15K £15K Cumulative income tax relief £15K £30K £45K £60K £75K £90K £105K £120K James could use this method to keep investing and claiming income tax relief indefinitely, subject to the rules remaining the same and certain conditions. But remember that VCT income tax relief can only be claimed for the same year as the year of investment and against tax actually paid. Year 1 £50,000 Year 2 £50,000 Year 3 £50,000 Year 4 £50,000 Year 5 £50,000 Year 6 FOR SALE Year 7 FOR SALE Year 8 FOR SALE VCT Reinvestment VCT Reinvestment VCT Reinvestment ISA £20,000 £10,000 PENSION 7 Clients who are additional rate taxpayers Ray is a doctor who earns an income of £210,000 per year. With his other savings income this means £60,000 of his income is taxed at the additional rate of 45%. His annual pension contributions are now restricted to £10,000 per year, as he has reached the upper limit of the tapered annual allowance. Ray earns an income of £210,000 per year It’s worth pointing out that VCTs are high-risk and inherently different to pensions and ISAs and shouldn’t be compared on tax benefits alone. One investor’s circumstances will be different to another and a VCT investment won’t be suitable for all, but the attractive tax benefits mean that VCTs could be considered as part of a portfolio for some people, alongside pensions and ISAs. STRESS WORRY Ray is concerned he may not earn at this level until retirement and that pension contribution restrictions mean he won’t have enough money put aside for his retirement Following a suitable recommendation from his adviser, Ray invests in a VCT: ISA PENSION VCT Upfront income tax relief on initial investment None 20-45% 30% Annual personal limits £20k £10k-£40k £200k Lifetime personal limits None £1.055m None Minimum holding period n/a No access until 55+ Five years Ongoing tax benefits Tax-free growth and dividends 25% tax-free, rest is taxed Tax-free growth and dividends √ √ Up to 30% Income tax relief on up to £200k p.a. in the tax year of the investment (subject to five-year minimum holding period) √ √ Tax-free dividends and no CGT to pay when he sells the shares