THE PROBLEM
Anthony is interested in diversifying his investment portfolio. He’s also keen to find ways to reduce his income tax bill. Anthony’s career is going well and his salary and investable assets put him firmly in the higher rate banding for income tax. His only concern is that he feels he’s paying too much income tax. Anthony has been investing in ISAs for several years now, making full use of his annual ISA allowance. But he’s been disappointed with the returns from his investments in recent years. He’s now looking for further ways to invest and is willing to accept the additional risk that comes with investing in smaller companies in return for government incentives and higher potential returns.
A POTENTIAL INVESTMENT SOLUTION
After speaking to his adviser and considering the risks, Anthony invests in a VCT. As well as helping to diversify his existing portfolio, many VCTs offer access to small, potentially high growth UK smaller companies.
Anthony would also benefit from the following tax benefits currently available to VCT investors:
- Income tax relief: Anthony would receive up to 30% income tax relief on the amount he invested each tax year, as long as he held the shares for at least five years. The amount Anthony can claim tax relief on cannot exceed £200,000 in each tax year, and his income tax relief cannot exceed the income tax he’s expecting to pay
- Tax-free dividends: If his VCT pays dividends, Anthony won’t have to pay tax on the income he receives
- Tax-free capital gains: If his VCT shares increase in value, Anthony will not be required to pay capital gains tax when he decides to sell them
CLIENT SCENARIO
If Anthony invests £50,000 in a VCT he will get income tax relief of up to £15,000 for that year. If he invested the same amount in the following year, he’d receive the same level of income tax relief again. After six years, Anthony could sell his original VCT investment and reinvest the proceeds into another VCT, and continue to do this year after year to keep receiving income tax relief on his investment.
This client investment scenario is designed to assist you in developing your own strategy where appropriate. Among other things, you will need to consider eligibility and timings of tax reclaims and tax liabilities depicted, and also the impact of charges (i.e. initial fee and ongoing fees, including administration fee and an annual management charge), as relevant to the product(s). This case study does not constitute financial advice or guidance. If you would like to discuss your personal situation, please contact us.
