Should Advisers be Reconsidering VCTs?

Many advisers will be considering increasing their use of VCTs in the light of recent changes to our pension system – lower annual and lifetime limits, restrictions on what high earners can save and the threat to higher rate relief. But ironically, just as it feels as though the VCT sector’s day has finally come, in the 2015 Budget we have witnessed the most dramatic revisions to the rules that govern VCTs since the scheme’s inception two decades ago.

Should advisers be put off by these changes? They have been driven by the need to comply with EU State Aid rules, (see our previous blog post on this here) and they will ensure that more capital reaches smaller, earlier stage companies, which intuitively feels more risky. They will have a big impact on some VCT’s business models and the tax-advantaged venture capital scheme industry (VCT, EIS and SEIS providers) continue to lobby against the changes.

However, all is not lost. There are plenty of VCTs out there that were already compliant with the new rules and will simply continue as before. As for other VCTs, the industry is well used to change and has a reputation for being adaptable. There is time to adjust, and there are enough caveats to the rules to smooth the transition from one operating model to another.

Of course, the big advantage of VCTs is upfront income tax relief and tax free income. The ability to earn tax free income is almost unique to VCTs and, when considered in the light of the pension changes, is a very attractive feature. The sector currently yields around 8.9% on average, and probably offers better value than overpriced shares.

On balance, we think for advisers with HNW clients, higher rate taxpayers and clients who are at or near their pension limits, VCTs should at the very least by part of their toolkit.

Advises who want to find out more about the current state of the VCT industry can download our latest, 90 page Industry Report here.