Venture Capital
4 minutes
13/02/2025
A new era for VCTs amid budget tax changes
Richard Roberts, Head of Sales Development, discusses how and why VCTs are establishing themselves as crucial financial planning tools for advisers and clients alike, in today’s evolving landscape.
Post-budget tax reforms and frozen allowances are reshaping investor sentiment, driving interest in Venture Capital Trusts.
Richard Roberts, Head of Sales Development explains how and why VCTs are establishing themselves as crucial financial planning tools for advisers and clients alike, in today’s evolving landscape.
Along with political turmoil, protests in the streets, £40bn of tax rises, and an increasingly flagging economy, the one key thing the Autumn Budget of 2024 finally left us with, was certainty. After months of speculation across the summer, resulting in inertia across the financial planning industry, the October Budget announcements meant that advisers and their clients could finally have a clearer picture of what they are dealing with, and plan accordingly.
The significant tax changes introduced by the Chancellor, include amendments to Capital Gains Tax (CGT), Inheritance Tax (IHT), and pension rules – the most impactful being that as of April 2027, pensions will now form part of the investor’s estate and be subject to IHT. These are significant changes for investors and advisers to grapple with and will require more people than ever to seek financial advice.
Increasing advice opportunities with VCTs
One area gaining increased attention is Venture Capital Trusts (VCTs). These tax-efficient investment vehicles are becoming more attractive as investors seek to mitigate the impact of the new tax landscape. Benefits include up to 30% income tax relief; CGT tax free growth; and tax-free dividends.
These generous benefits are no longer just the preserve of high-income earners and can lend themselves to a number of advice opportunities, relevant to all advisers and a variety of their clients. For example; income tax relief is not just limited to earned income and can be used to shelter against pension income, rental income, and dividend income.
VCTs are increasingly complementary to pension planning, diversifying and creating recurrent tax-free income streams; and can also be used for extracting profits from a business more efficiently, for company directors looking to draw more income. These types of advice opportunities are a great way for advisers to both retain and build a client base.
Strong demand for VCTs expected
Investor sentiment seems to re-enforce this increasing opportunity. VCT fund raising in the last quarter of 2024 has shown itself to be remarkably resilient given the market backdrop. At the time of writing* 29 VCTs had announced their intention to fundraise this tax year, with more expected to follow in the coming months.
Over £335m of capital has been invested from the start of September to the end of December 2024 – an increase of c.10% from the same period last year – and demand for funds being so strong, that a number of VCTs are filling their target allocation and closing in a matter of weeks.
Should this current trajectory continue as we enter the run up to tax year end, the market is forecast to eclipse the £880m raised last year and get towards the £1.1bn high of 2021/22*.
It is also worth highlighting, that although the headline tax changes are commanding the attention of advisers, the impact of frozen allowances is a damaging stealth tax in waiting. Recent data from the OBR* predicts that in the coming tax year, the impact of frozen allowances will bring seven million people into the higher rate (40%) tax bracket. This is almost 20% of UK taxpayers.
Helping deliver ‘best outcomes’ for clients
VCTs are therefore no longer just for the wealthy, it is becoming increasingly more applicable to the mainstream and should be considered as part of the financial planning toolkit – especially when looking to help clients save tax, shelter income, create long term wealth and deliver “best outcomes” for clients.
*January 2025
Sources:
RNS market data; OBR data; www.reuters.com/world/uk/uk-politicians-election-pledges-cant-stop-rising-tax-burden-2024-06-13
