In the last few months investors have seen a number of previously tax efficient investment opportunities go by the wayside as the government tightens the screw on tax perks and investment limits for pension saving, which is tempting higher earners to add more risky venture capital trusts and enterprise investment schemes to their retirement planning.
Now, a study by Ipsos Mori, conducted on behalf of the government, has delved into the motives of investors who have put money into venture capital trusts (VCTs).
The long-running government-backed investment scheme is designed to help boost the funding of small, unquoted companies. In return for putting their money into businesses that meet certain criteria on size, business activity and age, investors get generous tax reliefs, including a valuable slug of upfront income tax relief that reduces the cost of investing by 30 per cent.
In its research, Ipsos Mori found that, for more than three-quarters of investors (79 per cent), the availability of income tax relief was a crucial determinant in their decision to commit their money. More than half (54 per cent) said the capital gains tax breaks on offer from VCTs and the Enterprise Investment Scheme (EIS) were also important factors.
For those who have already filled their pensions and have reached the lifetime or annual allowance, VCTs can offer a tax efficient alternative that can deliver healthy returns however, they are not without risk.
VCTs are similar to investment trusts and spread investors’ cash across a number of companies, and are listed on the stock market. In comparison an EIS is a direct investment in one minnow company or several small businesses held in a trust.
Although the last tax year has just passed, there is a whole new basket of VCT and EIS tax perks available at the same level in the 2016-17 tax year.
Most VCTs launch new issues in the autumn, with the deadline the end of the tax year, although they will close if they reach their target earlier. EIS funds work in a similar way, but there are stand-alone opportunities during the year.
Income tax relief of 30 per cent is available on annual investments of up to £200,000 so long as the VCT is held for at least five years. That means a £10,000 investment costs £7,000. This tax relief is only available on new issues, not if the VCT is bought on the secondary market.
No capital gains tax is due on profits from the investment. No income tax is paid on dividends. So VCTs can offer a lot to those willing to take the risk of investing in a smaller business, but professional help should be sought before ploughing money into either of these schemes.