With the end of tax year approaching, commentators are predicting a bumper year for Venture Capital Trusts (VCTs) in light of the forthcoming increase in the top rate of income tax, as well as the reduction in pensions tax relief for higher earners. In fact one commentator predicts demand for VCTs to surge by 70% on the previous year.
Whilst time will tell if these predictions are right, the Association of Investment Companies (AIC) has collated the views of advisers and VCT commentators to gauge their views on what risk/reward issues investors need to consider when building a balanced VCT portfolio, as well as their views on how a VCT portfolio might complement a pension portfolio.
Martin Churchill, Editor, Tax Efficient Review said: “There is a resurgence of interest in VCTs this tax year and I expect demand to be around GBP250m, which would be an increase of about 70% on last tax year.
This is driven in my view by an appreciation that the initial tax break has allowed the performance of most VCTs to weather the credit crunch, a realisation that the successful VCTs are producing a very respectable annual tax-free income stream and the attraction of the VCT tax reliefs to high earners following the hike in the top rate of income tax and the pension changes.
“Potential new investors this tax year should approach the VCT market gingerly and use an IFA who is familiar with the various VCT categories and their differing risk/reward combinations.
"The first major question a potential investor faces is – are they looking for a long-term investment (seven to ten years in my view) with growth potential and risk, or looking for a place to “park” funds for six years and hopefully earn a good return compared to bank returns?
"Generalist/Specialist VCTs are the answers for the long-term investor and Planned Exit VCTs are indicated for the investor seeking lower returns but hopefully with lower risk of capital erosion.
"The second major question is the size and spread of the VCT exposure. I believe that VCTs should make up no more than 10% of an investor’s stock exchange investments and that this should also hold true for the amount of VCTs in a pension pot.
"In this tax year I think investors looking to add VCTs to their pension investments should have equal weighting of Generalist/Specialist VCTs and Planned Exit VCTs and a spread of at least two VCTs within each category.”
Ben Yearsley, Hargreaves Lansdown said: “With tax changes for high earners imminent and pension investment restricted, VCTs suddenly look a very attractive proposition for those looking to save tax, save for the long term and potentially provide a long term tax free income stream.
"Higher rate pensions relief is restricted to a maximum investment of £30,000 for some investors, therefore being able to invest £200,000 and receive a rebate of £60,000 looks an obvious alternative for higher risk investors.
“What percentage of a portfolio to invest in VCTs is largely determined by attitudes towards risk and timescale. I normally say only 5 to 10% should be invested in VCTs as don’t forget they are illiquid investments and access to the money can be restricted by the rules.
“Finally turning to where you should invest, I always believe in having a spread of different types and managers – thereby hopefully reducing risk and improving return. Limited life certainly can have their place in a portfolio, however I like the broader generalist VCTs for the majority of a portfolio.”
Matthew Woodbridge, Head of Investment Products, Chelsea Financial Services said:
The “Budget Bombshells” that were dropped by the Chancellor have made VCTs much more attractive to higher earners. For those earning in excess of £100,000 there is a severe attack on your personal allowance planned, together with the introduction of a 50% top rate of tax on income above £150,000. In light of this increasing taxation and changes to pension legislation, investors are turning to VCTs as a tax haven.
“With the proposed squeeze on tax relief for pension contributions, there are some compelling reasons to consider VCTs as part of your retirement/ tax planning. I think that tax free income is paramount to the attractiveness of VCTs. It is worth looking for a VCT which, either has a history of paying out a good level of dividends, or one which intends to have a strong dividend policy.
"For those earning £150,000 or more then making full use of their ISA allowance is the first priority and then pensions and VCTs. I feel that VCTs are useful as a complement to pensions but not as a direct replacement.”
Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “The attractions of the VCT sector have moved up the agenda
in the current tax environment, but it’s also worth remembering the old adage that the tax tail should not be allowed to wag the investment dog.
"There is a good deal of choice out there and it’s worth doing your homework thoroughly, and if in any doubt, independent advice should be sought. The Association of Investment Companies (AIC) provides a wealth of information on the sector, from a factsheet, performance analytics, total expense ratios and more, all available on our website."
TAX-NEWS.COM
Free Tax-News Feed