Venture Capital Trusts

[BrandNewCUKUser]

Hi,

I'm a contractor working through my own limited company and I'm currently going down the minimum wage/dividends up to the higher rate tax threshold route. I'd like to take some more money out of the company via an additional dividend but I'm not keen on paying the 25% extra in tax (or even worse!). I was looking to invest in a VCT as a way of avoiding it. According to the link (HM Revenue & Customs: Venture Capital Trusts) you can claim up to 30% of the investment against your income tax bill. It looks fairly clear cut but I just wanted to check that this can be against my dividends, and wasn't limited to the PAYE part of my income. I've emailed my accountant for their opinion and am waiting for a reply but wanted to know if anyone here had actually done this?

Thanks,

BrandNewCUKUser

[Danbro]

Venture Capital Trusts

Hi BrandNewCUKUser,

if you subscribe for new ordinary shares in a VCT, you can claim income tax relief at 30% on up to £200,000 pa. This is subject to you have sufficient income tax payable to absorb the relief.

There are other tax reliefs, such as not income tax on the dividends received from the investment, no CGT on the disposal of the shares.

You must hold the shares for at least 5 years, or you will lose the releif and will be required to pay back the tax.

Thanks

Neil

[Fred Bloggs]

Look very carefully at the performance of the VCT before you invest. Many of them have been dire from what I've seen. The old adage is true, never let the tax tail wag the investment dog.

[BrandNewCUKUser]

Hi BrandNewCUKUser,

if you subscribe for new ordinary shares in a VCT, you can claim income tax relief at 30% on up to £200,000 pa. This is subject to you have sufficient income tax payable to absorb the relief.

Hi Neil,

Thanks for the reply. That sounds like there's no distinction between the income tax I pay on my minimum wage salary or my dividends. Is that correct?

BrandNewCUKUser

[Danbro]

Venture Capital Trust

Hi Neil,

Thanks for the reply. That sounds like there's no distinction between the income tax I pay on my minimum wage salary or my dividends. Is that correct?

BrandNewCUKUser

The tax you pay on dividends is 'Income Tax' so yes the relief should be available to set off against your dividend tax.

Thanks
Neil

[BrandNewCUKUser]

Thanks Neil. Thought so, just needed it confirming.

[tangent]

Hi BrandNewCUKUser,

be careful with this - the 10% dividend tax credit cannot be reclaimed using VCTs. I think the extra 22.5% paid as a higher rate tax payer can be, but would not swear to it. Can anyone give a definitive answer?

[tangent]

I last bought some VCTs in 2006, when the tax relief was 40%. I have just checked my tax for that year and can confirm that the rule then was that VCT tax relief could be claimed against the extra tax on dividend income, at 22.5%, but definitely not the standard tax credit. I am fairly sure the tax situation on VCTs and dividends has not changed since.

For example, if you have dividend income of £9,000, this comes with a tax credit of £1,000, giving a gross dividend of £10,000. If this dividend is taxed at the 40% rate, then there is an extra 22.5% of 10,000 = £2,250 tax to pay. If you buy a VCT, for say £10,000 then you are entitled to £3,000 tax rebate where it is available (unlike with pensions, HMRC will not rebate tax you have not paid). In this case the £2,250 can be rebated, but nothing can from the £1,000 tax credit.

In 2006 I took a large dividend and offset most of the tax by buying 105k of VCTs, which after tax relief, cost 63k. The last time I checked the net asset values and dividend returns from this portfolio, it totalled 100,591, so I am down on the original 105k, but quite a bit up on what I actually paid. Not a spectacular return, but we have been through financial armageddon since. It also allowed me to take a large amount from the company virtually tax free and generates a tax free income (last year £3700), so I am in no hurry to bail out.

Edit - when I said "virtually tax free", I meant "free of higher rate tax and NI". I still paid corporation tax of course.

[BrandNewCUKUser]

Hi tangent,

Yeah I'm thinking along the same lines. I think there's scope to get a decent return on some of the lower risk 'Limited Life' ones but will have to do some more research. Any recommendations?

I've got another tax question too; this time around the 100K limit where you start to lose your personal allowance (by 1 pound for every 2 you earn). If I were to take a dividend that puts me over this limit (before the VCT relief is taken into account) will I still lose my personal allowance if the relief takes me back under this? I haven't done the numbers but I've read that there's a brutal marginal tax rate > 60% between 100-112K (with a typical personal allowance) which would make it more attractive.

BrandNewCUKUser

[tangent]

Hi BrandNewCUKUser,

VCTs will not help you with loss of personal allowance I am afraid. The way the tax saving works is like a rebate after working out your income tax. So if you earn 120k, work out the income tax you paid and divide it by 0.3. This will give you the maximum amount that it is worth putting into VCTs. But remember to not include the 10% tax credit in your income tax - there is no way I know of getting this back. You should also be careful if you want to make a personal pension contribution, as you cannot claim the same tax relief more than once! The various on-line tax calculators all get this wrong - even the HMRC self assessment one.

As for recommendations, I would definitely go down the limited life route unless you are particularly keen on investing in VCTs in the long term. I invested in just one of these, run by Puma that is now starting to return a significant chunk of my money and should wind up next year. Limited life VCTs are generally lower risk and lower return. However, I think the risk of VCTs is overstated anyway - you would have done far better with an average VCT over 5 years than you would have done with a portfolio of bank shares!

At the moment it is a bit early for VCTs and many fund managers have not released their offerings for this year, but I would recommend the Foresight Solar one at the moment. I have 2 Foresight VCTs and they are my best performers by a long way. My wife has just put 10k into VCT Solar. There are a few others available, but I have no experience with the fund managers.

Look for opinions on-line, e.g. h-l.co.uk and bestinvest.co.uk are usually good. No broker will tell you a VCT is bad though, as this would be biting off the hand that feeds them. I usually go through h-l.co.uk. Although they are the biggest broker, they seem to offer the best discounts. No point going direct to the fund manager - you will get a bigger discount by going to h-l.