Punter Southall Financial Management
An opportunity to enhance retirement planning
It is no secret that pension savers have experienced regular cuts to the amount of tax relief they are able to obtain on pension contributions, as well as potential tax charges, should their pension savings exceed the Lifetime Allowance (LTA) when drawn. This, coupled with the ISA savings limit of £20,000 per annum, has led many to find their ability to save restricted. A focus on alternative ways of enhancing retirement savings alongside the conventional routes has therefore become more prevalent.
Consequently, Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS), as an approach to saving, have seen a surge in popularity. For the right individual, this is a valuable opportunity to further enhance their retirement savings and is an area where we’ve invested a great deal of time and research in being able to provide our clients with a comprehensive suite of options.
A further boost to this area is provided by the Government who remain hugely supportive of EISs and VCTs given the benefits they provide in terms of innovation, employment and positive input for the UK Economy. A combination of reduced and limited tax advantages available to high earners and the benefit to the UK economy that VCT and EIS provide, has cemented their importance when planning for retirement for the right individuals.
VCT and EIS
VCT and EIS investments have often been thought of as the same from an investment perspective due to the fact they possess similar characteristics, such as their focus on investing in smaller companies or start ups as well as the Alternative Investment Market (AIM). In addition, both offer attractive tax reliefs which do overlap; income tax relief at 30% for example. As a result, confusion can arise when considering such investments.
EISs are designed to encourage investment in small companies, where traditional ways of raising capital are unavailable and where the companies carry greater investment risk. Part of the encouragement to investors is the attractive reliefs to investors the Government permit.
A VCT invests in a range of small companies, but via a VCT company, which is listed on the London Stock Exchange. The VCT company makes decisions on what companies they will deploy the capital to which tend to be small or expanding businesses.
Why do clients consider VCT and EIS investments?
In simple terms, and in our experience, the attractiveness of such investments lies with their available tax reliefs.
VCTs provide tax-free dividends, which make them appealing to higher rate tax payers who are looking to enhance their retirement income and can work complimentary alongside ISAs in “managing” an individual’s income position. This is in addition to the exemption to Capital Gains Tax (CGT) on disposal of shares, provided they were qualifying VCTs when shares were bought and sold, and that the shares purchased did not exceed the maximum allowable pertaining to the tax year in question.
One of the benefits of EIS investments is that there is no CGT to pay on disposal of shares as long as the shares remain qualifying and have been held for a minimum of three years. EIS investments also benefit from inheritance tax (IHT) exemption on the proviso they have been held for a minimum of two years and the underlying company qualifies for Business Property Relief (BPR).
One tax relief both EISs and VCTs benefit from is the 30% upfront income tax relief, (subject to meeting the qualifying criteria) and this is often the most appealing of tax reliefs for higher rate taxpayers.
Other reliefs are available, and this list is by no means exhaustive; however it does cover the points that clients are looking at in relation to supplementary savings.
It is important to note neither are a substitute for pension contributions. However, as pension contribution levels are becoming more complicated and restrictive, combining pensions with EIS and/or VCT subscriptions can be a complementary solution.
A note of caution
It is extremely important to highlight that such investments are not for all and come with inherent risks such as illiquidity, lack of diversification and being more volatile than other investments. As such, they are more suitable for experienced clients comfortable with investing money for significant periods of time.
The tax treatment depends on the individual circumstances of each individual and may be subject to change in future. These investments also place an individual’s capital at risk which needs to be taken into account when considering such investments.
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