VCTs bounced back in 2020/21, raising 4% more cash than the previous year and almost twice as much as a decade earlier. The current tax year is expected to see even more cash flood in, as investors shelter their money from dividend tax rises in April. But while the tax benefits are impressive, VCTs come with huge risks, so we can’t let the tax tail wage the investment dog. Demand for VCTs waxes and wanes depending partly on rule tweaks. In 2019/20 demand fell back because the rules were tightened to restrict where VCTs could invest, which made them a riskier prospect. The change was made in 2017, but it took effect more gradually. It’s also driven by changes in tax rules, and the 1.25 percentage point rise in dividend tax is expected to trigger a bumper year for VCTs. Demand also soars every time pension allowances get less generous, forcing those with higher incomes and large pensions to look elsewhere for tax relief. They came close to record highs between 2017 and 2019, when the pension lifetime allowance dropped from £1.25 million to £1 million. Tax-efficient investment gets more difficult as your income and your pension grow. The tapering of pension allowances for higher earners, the introduction of annual allowances and the shrinking of lifetime allowances have all meant investors looking elsewhere for tax relief. ISAs are a sensible first port of call, but once the annual allowance is used, they will cast the net wider, and VCTs offer substantial tax perks. The right VCT investment doesn’t just offer tax breaks, it also aims to offer significant capital growth and provide a stream of higher dividends, which look particularly striking at a time of lower interest rates. Tax-efficient investment gets more difficult as your income and your pension grow. The tapering of pension allowances for higher earners, the introduction of annual allowances and the shrinking of lifetime allowances have all meant investors looking elsewhere for tax relief. ISAs are a sensible first port of call, but once the annual allowance is used, they will cast the net wider, and VCTs offer substantial tax perks. The right VCT investment doesn’t just offer tax breaks, it also aims to offer significant capital growth and provide a stream of higher dividends, which look particularly striking at a time of lower interest rates.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of January 2022 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.