Unlock the Editor’s Digest free of charge
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
Retail traders are ploughing cash into small British corporations as they search out tax-efficient merchandise within the wake of Labour’s normal election win and the largest tax rise within the postwar period.
Savers sank £250.1mn into enterprise capital trusts (VCTs) from the beginning of the tax yr to mid-November — a 26.6 per cent improve on the earlier yr in accordance with figures from Wealth Membership, an funding service.
In final month’s Funds, chancellor Rachel Reeves raised the tax burden to its highest degree because the Fifties, introduced that pensions would not be exempt from inheritance tax and raised capital good points tax.
“Typically, as tax guidelines get tighter on pensions, the cash has to discover a house elsewhere and infrequently it goes into VCTs,” mentioned Alex Davies, chief government of Wealth Membership.
The VCT scheme, prolonged this yr till 2035, permits people to put money into early-stage companies by way of actively managed VCT funds.
Traders are rewarded with revenue tax reduction of as much as 30 per cent on as much as £200,000 a yr — supplied they buy shares at situation and maintain them for not less than 5 years. Dividends and capital good points are tax-free.
VCTs have beforehand backed family names such because the property platform Zoopla and the UK arm of the 5 Guys burger chain.
On Friday, funding platform Hargreaves Lansdown launched a brand new on-line VCT funding service, citing the federal government’s extension of the scheme and tax adjustments introduced on the Funds, which included elevating capital gains tax from 20 per cent to 24 per cent for larger earners.
Hargreaves’ service will debut with a gaggle of 5 VCTs managed by Calculus Capital, Octopus Investments and Blackfinch Ventures. Purchasers can pay a £50 dealing cost to use for the VCT service and a subsequent £50 payment to commerce. Hargreaves won’t take commissions or cost platform charges.
Emma Wall, head of platform investments, mentioned the federal government had supplied “assurances” it might retain the construction and tax effectivity of VCTs.
Enterprise capital trusts supply the prospect of upper returns than different belongings, however include better danger and low liquidity.
Paul Stewart, monetary planner at Finura, mentioned savers ought to expend their Isa and pension allowances earlier than contemplating riskier VCTs.
“The large benefit [of VCTs] is the upfront 30 per cent tax reduction,” he mentioned. “The place it turns into essential is for larger earners who due to the pensions taper have their annual allowance decreased. By the point you’re incomes £360,000, your allowance is decreased to £10,000.”
Traders have to be prepared to “tie up capital for 5 years” to profit from tax breaks, famous Katherine Waller, co-founder of wealth supervisor Six Levels, which advises rich people and entrepreneurs.
“By investing in a VCT, you’re successfully investing in a portfolio,” added Richard Stone, chief government of the Affiliation of Funding Corporations. “You’re spreading that danger throughout a spread of companies and also you hope that the handful of winners beats the handful of losses. However by the character of it being excessive danger, a few of these companies fail.”
Waller tells her purchasers that VCTs “shouldn’t ever kind greater than 10 per cent of the worth of their property due to the illiquidity and the extent of danger”.
Inflows to VCTs hit an all-time excessive in 2021, surpassing £1bn for 2 consecutive years earlier than falling to £882mn in 2023.
“From 2010 onwards, we noticed an enormous uptick within the VCT market,” mentioned Davies. “After which [in the 2023/24 tax year] the principles on pension allowances have been tweaked barely, in order that larger earners may put extra into their pensions than beforehand. In consequence there was much less cash in VCTs.”
The drop in VCT funding adopted a wider slowdown in personal markets that was pushed by an financial downturn and excessive rates of interest.
“It appears like we’re turning a nook now,” mentioned Davies.
There have been 50 VCTs totalling £6.3bn in belongings below administration as of the tip of October, in accordance with the AIC.
Forty-three of those invested largely in unquoted corporations and managed £5.6bn. The rest invested in corporations quoted on Purpose, London’s junior inventory change for small-cap shares.
