Tax-efficient investments are increasingly being used to complement pensions as part of an overall retirement planning solution. The tax relief provides a reliable return and you are able to access your money after the tax qualification periods, either to reinvest in tax-efficient investments for another round of tax relief, or to invest elsewhere.
Appropriate investors can choose to reinvest the upfront tax relief, either into a Venture Capital Trust (VCT) or Enterprise Investment Scheme (EIS) for further income tax relief or directly into a pension. The net effect is a significant increase to the investor’s retirement fund based upon tax relief rather than stock market performance. As with pensions, you can, if appropriate to your particular situation, make investments into VCTs or EISs over many years, providing diversification and access as each investment period is reached.
There are other factors that point to VCT and EIS solutions being useful tools for retirement planning and as part of an overall investment portfolio. Significantly, pension investments are largely subject to income tax as they are drawn down, whereas VCT and EIS solutions are not. Also, while VCT and EIS investments have to be held for a fixed period to qualify for tax relief, after the holding period, you have additional flexibility when compared to pensions.
However, it is crucial not just to consider them in isolation, but as a valid and important part of an overall portfolio. Even compared to Individual Savings Accounts (ISAs) – the mainstay of tax-efficient investing – they offer generous tax reliefs because, not only is growth tax-free, income tax relief is available on investing.
They are often rated higher risk because they invest in smaller unquoted stocks and due to a lack of liquidity – indeed they have to be held for a set period to retain the tax reliefs. Therefore it is vital that they are appropriately weighted within your portfolio.
They also offer an investment solution that is largely uncorrelated to the markets, and therefore a complementary asset class to more traditional pension investments.
Information is based on our current understanding of taxation, legislation and regulations. Any levels and bases of, and tax rules and reliefs from taxation are subject to change.
These investments are NOT suitable for everyone as they are higher risk investments. The investor could lose some or all of their investment. You should seek professional specialist tax and financial advice before taking any course of action.
Venture Capital Trust
Investors must retain their VCT shares for five years to retain the up-front income tax relief. Please remember that the tax rules and regulations governing VCTs are subject to change. The tax reliefs available to certain investors in VCTs are dependent on individual circumstances as well as the VCT maintaining HM Revenue & Customs approval. If this approval is withdrawn, a VCT will lose its status and all tax reliefs are likely to be cancelled.
The share price of a VCT may not reflect its net asset value. There is only a limited secondary market for shares in VCTs which may render such shares difficult to sell as they may not be readily marketable. VCTs invest in unquoted and AIM-quoted companies which are therefore smaller and carry a higher level of risk than shares which are listed on the main market of the London Stock Exchange. The shares of VCT investee companies may not be readily marketable. An investment in a VCT should be regarded as a long-term investment.
Enterprise Investment Scheme
Investments into an EIS must be retained for a minimum of three years in order to retain the upfront income tax relief. Investments made into EIS qualifying companies, because they are in unquoted companies, are likely to be higher risk than securities listed on the main market of the London Stock Exchange. Investments in shares in unquoted companies are not readily marketable and the timing of any share sales and other such realisation cannot be predicted or controlled. A partial withdrawal of an investment in an approved EIS fund is not permitted. Tax rules and regulations are subject to change, and depend on personal circumstances. Please be aware that investments within an EIS may cease to qualify. In this case, the relief available on that particular investment will be lost.
