Why more advisers are turning to VCTs

Thanks to recent legislation changes, more clients are finding themselves in situations where they could potentially benefit from investing in a VCT.

This is reflected in the fundraising figures, which have shot up in recent years. For the 2017-18 tax year, the total raised by all VCTs was more than two-and-a-half times the sum raised five years earlier.

More advisers are looking at VCTs for clients who, not so long ago, they probably wouldn’t have.

So even if you’re not looking to grow your client base, VCTs could help you do more for the clients you already have, from those bumping up against their lifetime allowance for pension contributions (LTA) to high earners seeking to reduce their income tax bill.

Landlords and business owners are also among those who could benefit.

But not all advisers are tapping into VCTs’ full potential. Some worry they’re too niche. Or too risky. Or they’re not sure they have clients who could benefit.

This could be a mistake. While it’s true that VCTs won’t be right for every client, it’s also true that for many clients they can help solve increasingly common problems.

VCTs have been established for over two decades

Because VCTs are a relative niche investment, some advisers tell us they’re hesitant about recommending them. They worry they’re not tried and tested.

It’s important to note that VCTs have been around for more than two decades now. Since their launch in 1995, they’ve raised over £7 billion for investment into high growth UK businesses, including more than £700 million in the most recent tax year.

So while VCTs may be niche compared to many other investments, they’re a well-established part of the investment landscape.

VCT tax reliefs can help with planning

Another concern we hear from some advisers is that VCTs are too risky. After all, they invest in early-stage companies, not all of which will make it.
That’s why VCTs offer attractive tax reliefs on investments up to £200,000 each year. The government created VCTs to give investors an incentive to put their capital at risk and back early-stage businesses.

VCT investors can claim up to 30% upfront income tax relief, provided they hold the investment for five years. And there’s no tax to pay on any dividends or capital gains.

If a client has the right capacity for risk, then these tax reliefs may mean a VCT is well worth considering. The upfront income tax relief can be particularly useful in a broad range of different planning scenarios (see below).

You may have more clients than you think who could benefit

A big reason more advisers are using VCTs is that they have more clients in situations where a VCT can help. Changes in legislation mean that clients may now find themselves in significantly different circumstances compared to just a few years ago.

Take clients saving for retirement. They can now incur additional charges if they exceed their annual allowance for pension contributions or their lifetime allowance (currently £1.03 million).

For those clients worried about triggering these charges and who are comfortable with the associated risks, a VCT can be a tax-efficient way to invest as part of a retirement strategy.

Or how about clients who own a business. Recent changes to dividend taxation mean entrepreneurs who pay themselves through dividends could face higher tax bills and lower take-home earnings. VCTs could be a way to offset these costs and help clients extract money from a business tax efficiently.

To see how VCTs could help clients in these situations, take a look at our planning scenarios.

Landlords are another group who could benefit from VCTs

Then there are those clients who own rental properties. Until 2017, buy-to-let landlords could deduct their mortgage payments from their rental income and only pay tax on the net income. The government is now phasing out this relief. From April 2020, landlords will only receive a tax credit. As this credit will only refund at the basic rate of tax, higher or additional-rate taxpayers won’t get all the tax back on their mortgage repayments.

It’s part of a broader shift that has made investing in rental property less lucrative. Landlords have also been affected by the introduction of a higher rate of stamp duty on purchases of additional homes.

On top of that, a draft Tenant Fees Bill aims to limit how much lettings agents can charge tenants, meaning they could well increase the fees they charge landlords to make up the shortfall.

These recent changes have made it even more important for landlords to consider the tax implications of their property investments.

See our planning scenarios for information on how a VCT could help landlords make a tax-efficient income from rental property.

Note that VCTs are versatile, and don’t just benefit clients facing the problems outlined above. Any high earning client who is comfortable with the risks could potentially benefit from using the upfront income tax relief as part of their planning.

Risks to keep in mind before recommending a VCT

Of course, just because a client faces one or more of these problems, that doesn’t automatically mean a VCT will be the right choice.

VCTs invest in smaller, less established companies, and this type of investing won’t fit with the risk profile of some investors. The value of a VCT investment, and any income from it, can fall as well as rise and investors may not get back the full amount invested.

As well as the risk of loss, clients should be aware that the share prices of VCTs can move around more than other companies you’ll find listed on the London Stock Exchange’s main market. They can also be harder to sell.

Clients should also remember that tax treatment depends on individual circumstances, and tax rules could change in the future. Tax reliefs also depend on the VCT maintaining its VCT-qualifying status.

How to unleash the full power of VCTs

Octopus has a wealth of practical resources you can use to help your clients make the most of VCTs.

Last year, more than 400 advisers wrote their first VCT case with us. This is indicative of the trend toward greater use of VCTs.

In fact, in 2017 64% advisers said they expected to use more VCTs in the next two years, according to a survey published by Intelligent Partnership. That’s up from just 33% the previous year [1]. 80% of advisers said they had recommended VCTs in the previous twelve months, up from 66% of advisers the year before.

Now is a great time to take a closer look at VCTs and how they could help your clients.

To get started, access our VCT resources now.

Visit the VCT hub Request your CPD

Personal opinions may change and should not be seen as advice or a recommendation. VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. We record telephone calls. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: November 2018. CAM07626-1811

[1] Source: Venture Capital Trusts: Industry Report 16/17, p44