Reducing an income tax bill

By investing in a Venture Capital Trust (VCT), high earners can not only target returns from dynamic businesses, but also reduce their income tax bill.

This tax-planning scenario illustrates how this can be achieved for a client.

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About this planning scenario

Anthony is a director of a media company who wants to reduce his income tax bill

Anthony earns a good salary and significant annual bonuses. He has accumulated significant Individual Savings Account (ISA) savings (more than 200,000) and pays large amounts into his self-invested personal pension (SIPP) each year.

With a high annual tax bill, and substantial tax-efficient pension and ISA investments already, Anthony is interested in other government-endorsed ways to reduce the amount of income tax he pays.

Anthony would consider investing in UK smaller companies and is comfortable with the associated investment risk.

Anthony’s financial adviser suggests investing in a VCT

Antony talks to his financial adviser, who makes an assessment based on:

• His risk profile
• His investment time horizon: more than five years
• His attitude towards investing in smaller companies

Given this, his adviser suggests investing £50,000 of his annual income in a VCT each year.

In order to keep the upfront income tax relief claimed, VCT shares must be held for at least five years (should Anthony sell the shares before then, he would have to repay the tax relief to HMRC).

However, after five years, Anthony could sell his first VCT investment, then reinvest any sales proceeds in another VCT and use the additional income tax relieve to reduce his year six income tax bill. Similarly, Anthony’s year two VCT investment could be sold and reinvested in another VCT in year seven, giving him additional income tax relief, and so on.

Invest £50,000 and claim £15,000 income 
tax relief

This flow chart shows how Anthony can claim income tax relief from each VCT investment he makes across several consecutive tax years. We’ve used six years as an example but in practice he could use this method to keep claiming income tax relief indefinitely. This is, of course, subject to certain conditions including the requirement to hold VCT shares for at least five years in order to retain the 30% upfront tax relief.

If an investor needs guaranteed income, cannot tolerate loss or is uncomfortable losing immediate access to their money, then VCTs are not suitable.

Note: Tax rates and allowances are correct for the tax year 6 April 2023 – 5 April 2024. For purposes of this illustrative example, we have assumed no gain or loss on investments, and it does not take into account any initial fees or ongoing charges that will be incurred. VCTs are high risk and inherently different from pensions and ISAs. When clients choose to sell VCT shares, they are often sold at a small discount to the value of their underlying net asset value, so the impact of this should also be considered when assessing any specific products. Please note, after selling shares in a VCT, it is not possible to claim tax relief on new shares bought in the same VCT within six months of the initial sale.

Before investing in a VCT, investors should read the product prospectus and Key Information Documents (KID).

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