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| Venture Capital Trusts – An Opportunity To Invest And Obtain 40% Income Tax Relief |
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TaxationWeb by Bob Fraser MBA MA FSFA Bob Fraser, Associate Investment Director of Rensburg Investment Management Limited, outlines the potential tax incentives offered to Venture Capital Trust Investors Following the Finance Act 2004, individuals can invest up to £200,000 into VCTs and obtain 40% income tax relief even if not a higher rate tax payer. This income tax concession will only be available for the 2004/05 and 2005/06 tax years.Tax advantages…The tax advantages are:1. 40% relief on the initial investment against income tax, provided the VCT shares are held for a minimum of 3 years. Employees obtain this income tax relief by a reduction in their PAYE code. The self employed can obtain a reduction in the payment on account if the contribution is made prior to 31/1/05 (or 31/1/06 in respect of subsequent contributions). This tax relief gives a significant uplift to an investment. For example, if £6,000 is invested it would have to grow by 66% to become £10,000. £10,000 invested into a VCT with a 40% tax rebate reduces the net cost to £6,000. Effectively, therefore, the tax relief provides an immediate 66% investment return. 2. Tax-free dividends VCT. 3. No capital gains tax on any subsequent sale of VCT. 4. No tax on capital gains made within the VCT, so the VCT company can pay these to investors as part of a tax-free dividend. This is, however, a limit to the Inland Revenue’s generosity, and that is that the amount of tax relief cannot exceed the income tax payable in the year of investment. To illustrate this, an employed individual earning £35,000 will pay £6,414 in income tax. This would allow an investment of £16,035 into a VCT, with £6,414 relievable at 40%. An investment of more than £16,035, whilst permissible, would not result in any more tax relief. …and caveatsThe following caveats must also be noted:- VCTs are longer-term investments, and should not be contemplated for periods of less than 5 years. In any case, the shares must be held for 3 years to maintain the tax relief. - VCTs must be regarded as higher risk investments, and are only suitable for individuals with the capacity for risk for such investments. These can fall in value, as well as rise. - The shares in a VCT may not be fully liquid – shares can only be sold if there is a buyer for them. - Contributions into a VCT must be as a lump sum, and there is normally a lower limit. The choice of which VCT to use for the investment is critical as this will determine such issues as performance and liquidity. Independent financial advice must always be taken by a prudent investor. Bob Fraser, MBA, MA, FSFA Associate Investment Director Rensburg Investment Management Limited Contact Bob Fraser February 2005 Bob Fraser is an associate investment director and has achieved the highest level of professional advisory qualifications in the financial services industry. He is a Fellow by examination of Personal Finance Society, which is a specialist faculty of the Chartered Insurance Institute. He also holds a Masters of Business Administration degree. Email your enquiry Rensburg Investment Management is the largest company in the Rensburg group and a subsidiary of Rensburg plc, a public company whose shares are quoted on the London Stock Exchange. Its core business is investment management and it currently looks after around £3.0bn of funds for private investors, trustees, charities and pension funds. It provides independent financial planning advice and investment management services to both individuals and businesses in order to meet their financial objectives. Financial planning is the process by which resources and risks are firstly identified and then used or provided for in a way which best achieves financial goals and lifestyle. It provides detailed advice to clients across the whole range of financial planning issues from the provision of straightforward life assurance, to savings and retirement planning, to complex inheritance tax planning arrangements. Email your enquiry Rensburg is authorised and regulated by the Financial Services Authority (FSA) whose function is to provide investor protection through the regulation of financial product providers in securities and derivatives business.
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About The Author  Mark McLaughlin is TaxationWeb's Co-Founder, Director and Technical Editor. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners. He lectures on tax subjects, is co-author of Tottel's IHT Annual and Ray & McLaughlin's IHT Planning, and Editor of Tottel's Tax Planning and Annual series. Mark's work has also been published in Taxation, Tax Adviser, Tolley's Practical Tax, Tax Journal and Simon's Weekly Tax Intelligence. Since January 1998, Mark has been a consultant in his own tax practice, Mark McLaughlin Associates, which provides tax consultancy and support services to professional firms. He publishes a regular 'Tax Update' e-Newsletter for clients and other professional firms. To receive future copies, contact Mark via his website. |
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Article Added Sunday, 06 February 2005 | 6566 Hits |
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