Investors have a perfect window of opportunity to invests in small businesses as the government continues to make the future uncertain by tinkering with pensions and buy to let tax.
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Venture capital trusts are one of the longest established tax breaks for investors, but although recently seeing record levels of investment, are still only really known to the experts.
For pension savers who are running out of headroom since the government capped the lifetime allowance at £1 million, a VCT offers an alternative home for retirement cash.
The risk is many high earners risk breaching their lifetime allowance before they retire, even if they are saving relatively small amounts.
At the same time, the annual pension saving allowance has plunged to £40,000 – and tapers to £10,000 for those additional rate taxpayers with salaries of more than £150,000.
Pension alternative not replacement
A VCT will not replace pension investments, but once the tax limits are reached, any extra savings can be swept up.
VCT offer several attractive tax reliefs on a maximum annual investment of £200,000:
- 30% relief on income tax paid – so a £200,000 investment comes with relief on income tax paid of £60,000
- The sale of any VCT shares held for at least five years is free of capital gains tax
- Investors approaching retirement can look forward to receiving tax-free dividends on their VCT shares
Any investment can be shared around several companies, if the annual cap is not breached. Several managers offer VCT funds that do the job for investors – at a price, of course.
The tax-free dividend is an attraction for retirement as VCTs are the only government investment tax incentive that offers the feature.
Both the Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Social Investment Tax Relief come with inviting tax incentives, but no tax relief on any dividends paid. No rule bars an investor spreading money across each of the scheme in a tax year.
Income tax relief in VCTs can be claimed in the year of investment, unlike the others that also allow carry-back to the previous year. None of the schemes allow carry forward of tax relief.
If VCT shares are held for less than five years, HMRC will strip away the tax relief.
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