Sunday 23rd October 2016                 Change text size:

Advisers predict increasing interest in venture capital trusts

germany wind By Peter Heilmann via Flickr

As the new limits on pensions contributions come into effect, almost a third of financial advisers predict that levels of interest in venture capital trusts (VCTs) will increase this tax year.

A survey commissioned by Albion Trust found that 31% of advisers think interest in VCTs will pick up, compared to the 3% who forecast a fall in support. According to advisers, the main reason for client interest is VCTs’ ability to generate tax-free dividends.

Other reasons cited by advisers included the new limits on pension contributions, portfolio diversification, clients maximising their ISA contributions and the fact that financial advisers are becoming increasingly familiar with the sector.

Mark Hoskin, financial adviser and partner at Holden & Partners in London, said, “There are two key aspects to consider when replacing a pension contribution with a venture capital trust. Firstly, is the client prepared to accept the business risk involved? And secondly, the tax position of the client.”

He explained that from a tax perspective clients not only need to think about the current position but also what the government may do next. Currently, it is possible up receive up to 45% income tax relief on pension contributions. However, when investors come to take their benefits, after any tax-free cash that might be due, these will be taxed at the highest marginal rate, which could be 45%.

This compares to VCTs for which there is a 30% income tax relief upfront but on which future tax dividends are tax free, irrespective of the tax band of the investor. This makes VCTs “extraordinarily attractive to high earners”.

Hoskin added, “It is my opinion given the obvious tax benefits and with the government reducing the annual allowance for pensions to £40,000 per year and the lifetime allowance to £1.25 million that there will be a greater number of investors looking seriously at venture capital trusts in the future.”

For ethical and sustainable investors there are limited choices available for investing in VCTs, but some options do exist. Hoskin pointed out that at the moment Ventus VCT plc and Ventus 2 VCT plc are raising a further £20m in a new ‘D’ share class.

The D share class will be looking to finance two hydroelectric plants in Scotland and some onshore wind farms. “For investors looking to invest in this area it is definitely worth considering,” he said.

Further reading:

Autumn statement: financial advisers talk social investment tax relief

Bloomberg: clean energy investment decline is ‘worrying’

UK told to keep up with fellow competitors in ‘global green race’

The wealthy are not tax dodgers; they’re a positive force in society

Gap revealed in UK venture capital market

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