With the end of tax year approaching, commentators are predicting a bumper year for 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.
The Association of Investment Companies 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, says: “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 per cent 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.
Churchill says 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.
He says VCTs should make up no more than ten per cent of an investor’s stock exchange investments and that this should also hold true for the amount of VCTs in a pension pot.
Ben Yearsley (pictured) of Hargreaves Lansdown adds: “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 GBP30,000 for some investors, therefore being able to invest GBP200,000 and receive a rebate of GBP60,000 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 five to ten per cent should be invested in VCTs as don’t forget they are illiquid investments and access to the money can be restricted by the rules.”
Matthew Woodbridge, head of investment products at Chelsea Financial Services, says 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 GBP150,000 or more then making full use of their Isa allowance is the first priority and then pensions and VCTs.
