Venture capital trusts are sweeping up more money from investors as the opportunity to stake savings in other tax efficient investments dries up.
In 10 years, VCT investment has surged by 375% to £731 million as tax changes have knocked other investments, such as pension saving and buy to let.
VCTs back small, new companies without trading histories which would find fund raising difficult from traditional sources, such as banks.
To encourage investors, the government offers a 30% income tax refund on investments up to £200,000 in any tax year, plus tax-free dividends and no capital gains tax on any growth in share value.
The downside is money must stay in a VCT for five years.
Tax relief for investors
Tax relief is only available on the purchase of new VCT shares, but those purchased on a secondary market qualify for dividend and CGT relief.
Expats cannot claim VCT reliefs if they are not UK tax resident.
For investors earning more than £150,000 a year, pension contributions are tapered to £10,000 rather than allowing the full £40,000 tax-relieved contributions available to investors on lower tax rates.
Buy to let has suffered from a series of tax hikes – including the scrapping of higher rate mortgage interest relief and enhanced stamp duty and capital gains tax rates for landlords and second home owners.
High risk businesses
This makes VCTs attractive savings vehicles even though the risks of staking money against the success of untried companies is high.
Many of these businesses fail within the five-year VCT investment term.
Annabel Brodie-Smith, communications director of the Association of Investment Companies, said: “VCTs offer a highly tax-efficient way to invest. The popularity of the trusts has grown significantly in recent years.
“The restrictions on pension investments and the taper down in contribution allowances have been big drivers in the increasing investment in VCTs.”
But she warned putting money into VCTs is not the same as investing in a pension because of the risk involved in fresh start companies becoming a success.