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VCTs to offset Tax

Sophisticated and complex high-risk tax-sensitive investments in small companies: handle with care
Cookie
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VCTs to offset Tax

#239633

Postby Cookie » July 27th, 2019, 8:10 am

Since the dividend tax changes some years ago, I have used VCTs to offset dividend tax. I have a relatively large amount of dividend tax as I work through a Ltd

What other large taxes do others use VCTs to offset?

Since the VCT changes to what they could invest in, I have been trying to evaluate the risk Vs tax benefit

Has anyone attempted a calculation of return, taking into account the tax benefit?

Is anyone willing to share an example (good and bad equally helpful to show range)?

Has anyone seen a notable difference in risk and the investments VCTs now undertake?

VCTs do require a great deal of research. I have dabbled in share investment this year, so becoming better in research and comparison, although there are atributes specific to VCTs I am still learning

I started with and have increased Albion due to the asset backed investments

I dabbled with Downing due to the high dividends, but now see the slowly eroding NAV and realise they are paying dividends out of capital

UncleEbenezer
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Re: VCTs to offset Tax

#239639

Postby UncleEbenezer » July 27th, 2019, 9:09 am

You've asked too many and too general questions to do justice to in a single response, or even realistically a single thread. But there's quite a lot that's relevant in the archives of this board, and things will no doubt come round again.

Just stick around, and trawl the archives.

127tolmers
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Re: VCTs to offset Tax

#239669

Postby 127tolmers » July 27th, 2019, 11:04 am

One way to answer some of your questions is to look at Trustnet statistics.

https://www.trustnet.com/fund/price-per ... tVct=false

As of today there were 234 Investment trusts with 5 year records. 17 lost money but the median return was 54% over 5 years before tax on gains or dividends.

Looking at VCTs:

https://www2.trustnet.com/venture-capit ... e?univ=VCT

There were 56 VCTs with 5 year records. 8 have lost money but the median return was 36% over 5 years on a share price total return but there is no tax on dividends or capital gains and if bought new 30% immediate upfront tax relief.

Clearly there are caveats on survivorship bias & VCT performance based on old VCT rules. However a mix of VCTs would appear to have a place in a portfolio if the tax reliefs can be utilised and risk can be managed.

scotia
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Re: VCTs to offset Tax

#239681

Postby scotia » July 27th, 2019, 11:37 am

127tolmers wrote:However a mix of VCTs would appear to have a place in a portfolio if the tax reliefs can be utilised and risk can be managed.

I agree - and still feel that this is true - albeit I suspect the returns going forward will be less than previously. As the figures quoted show, the initial tax relief on new VCT issues is a substantial contribution to the return, so this is definitely a 5-year hold investment to get the tax break. I currently keep VCTs to around 10% of my investments, and I recycle them after 5 years to maintain the tax break.

BusyBumbleBee
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Re: VCTs to offset Tax

#239684

Postby BusyBumbleBee » July 27th, 2019, 11:43 am

I have attempted to answer your questions within your original post thus { -- --}
Cookie wrote:Since the dividend tax changes some years ago, I have used VCTs to offset dividend tax. I have a relatively large amount of dividend tax as I work through a Ltd { -- Do you also pay income tax ?--}

What other large taxes do others use VCTs to offset? { -- the only tax you can save is Income tax and you get 30% relief either up to your total IT bill for the year or £60,000 - whichever is the smaller --}

Since the VCT changes to what they could invest in, I have been trying to evaluate the risk Vs tax benefit { --and your conclusion is? ... --}

Has anyone attempted a calculation of return, taking into account the tax benefit? { -- all of us and we are all coming to different conclusions - I - having invested in VCTs for over 20 years, am out of the market for them at the moment except for the DRIS schemes for Albion and Amati simply because most managers are going into uncharted territory--}

Is anyone willing to share an example (good and bad equally helpful to show range)?{ -- Tolmers has done some already and if you specify more closely I will give you examples BUT I have made as much money buying distressed VCTs in the 2nd hand market as buying new--}

Has anyone seen a notable difference in risk and the investments VCTs now undertake? { -- Yes - but that is on my definition of risk--}

VCTs do require a great deal of research { -- indeed they do --}. I have dabbled in share investment this year, so becoming better in research and comparison, although there are attributes specific to VCTs I am still learning { -- we are all still learning - particularly coming to terms with the new rules--}

I started with and have increased Albion due to the asset backed investments { -- probably the best choice - it is my favourite management group for generalist VCTs as is AMATI for Aim shares --}

I dabbled with Downing due to the high dividends, but now see the slowly eroding NAV and realise they are paying dividends out of capital { -- Downing have swallowed/merged with over 20 other VCTs ( ?£400 million plus of investors money?) - and they are still (as you noted) going down, down, down.--}


Hope this is useful - but don't let the tax tail wag the dog. Regards - BBB

Julian
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Re: VCTs to offset Tax

#240228

Postby Julian » July 29th, 2019, 4:25 pm

On the tax question it's pretty much irrelevant. If you invest £10,000 and hence are entitled to £3,000 tax relief in the year of purchase (for example) your SA100 tax calculation will go something like this...

Your income from every declarable source (e.g. salary, pension, rental income, dividends, foreign income, etc, etc)
Minus "normal" allowances (e.g. personal allowance)
Total income on which tax is due
... and after a "How we have worked out your income tax" section it then gives you the dreaded ....
Income tax due total for the tax year

... it is then only at this point, after the SA100 calculation has been done on all income sources, that you see ...

minus Venture Capital Trust relief (in my example £3,000) which then obviously leads to a reduced total.

... i.e. VCT tax relief is handled essentially as if HMRC had paid the first £3,000 of your tax bill for you (again, that's just my example) on whatever the total bill was for the year regardless of source.

By the way, I have one of my old SA100 calculations of screen as I type this so the above is pretty much verbatim from a real example, minus my actual numbers of course and with a few detail/break-down lines skipped but all of the breakdown of detail is before the application of the simple one-number VCT credit for the year so can't possible be differentiated in terms of source of income.

- Julian


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