VCTs are best known as tax efficient vehicles and with good reason: they offer a range of tax benefits, the main one being a 30% tax rebate on the amount invested, alongside the potential for tax-free capital gains and tax-free dividends. At this time of year, as the tax year end approaches, they're always in the spotlight, as they can help investors reduce their tax burden. However, VCTs can do a lot more for investors besides deliver tax relief in the short-term. They're now becoming part of investors' long-term financial plans, incorporated into everything from pension planning to investment strategies.
A major reason for this shift is that changes in tax policy around pensions are leading investors to incorporate VCTs into their retirement planning. There are also simple but effective strategies that can be applied to maximise the 30% tax rebate. But beyond that, product design and strategy around VCTs has come a long way, making them much more accessible. There are now lower risk VCTs on the market designed in response to investors' concerns about risk, meaning that many more investors can consider VCTs as part of their financial plans.
Of course, integrating VCTs into pension planning is the priority for many investors. Following last year's budget and Pre-Budget Report (PBR), high earners especially are looking at new ways to plan for retirement. With policy changes coming into effect in April 2010, tax benefits available from pensions are going to be much more limited. However, using VCTs can help. To give an example, with the 30% tax rebate, a £300,000 earner investing £100,000 into a VCT will receive £30,000 in tax relief on that investment, compared to a pension tax relief of just £25,000 when grossed up. There are also other factors which make VCTs useful in retirement planning: they're not partially subject to income tax when they're drawn down as pensions are, they deliver tax-free dividends, and after the investment period, they provide greater access to funds than a pension.
As well as using a VCT in its entirety for financial planning, the 30% tax rebate itself can also be put to work over the longer term. Going for ‘compound' tax relief rather than just the one 30% tax rebate can be very effective. The idea behind compound relief is relatively simple: an…
