Case Study:
VCT Rolling Program
The Client
Tony earns a large salary as well as significant bonuses, and wants to use a series of investments to continue claiming income tax relief in future years.
The Scenario
Tony chooses to begin a multi-year rolling VCT program with GrowthInvest. He decides to invest £200k per annum across a portfolio of VCTs. Each year that he invests, he is able to claim £40k of tax relief for that year. He will also benefit from a tax free dividend of £10k for every £200k he invests (assuming a 5% dividend yield).
After 5 years
Tony will have invested a total of £1m, received tax relief of £200k and dividend income of £150k.
In year 6
After his first investment reaches the 5 year mark, Tony can choose to sell these shares. He could then use the proceeds to invest into a new VCT, using his first year’s capital to claim fresh income tax relief in year six. In the following year (year 7) he can sell and reinvest his year two investment and again claim further tax relief. And so on.
At the end of year 10
If Tony has sold and reinvested all of his investments from the first 5 years, he will still have invested a total of £1m. However, he will have received £400k in tax relief and £400k in dividends. Therefore after year 10 Tony’s total net outlay would then be £200K, but he still holds a VCT portfolio worth £1m, which will yield him £50k per annum until he decides to sell them. If he continues to recycle his portfolio past year 5, ie selling the year 6 investment in year 11 and reinvesting the money in a new VCT and so on, the cost of his £1m portfolio will trend to 0. Under the previous income tax regime where the initial tax relief was 30%, at year 10 the net cost would be 0. With the current 20% income tax relief the period is extended to 13 years.
Tony's VCTs
ASSUMPTIONS
Investment Amount :
Target Dividend Yield:
Income Tax Rate:
£200k per annum
5% per annum
20%
NOTE: The above table is for illustrative purposes only, representing a simplified example of the economics of conducting a VCT rolling program. The target dividend yield is intentionally set below current market rates, actual realised dividends may well differ. Likewise, the above example does not factor in the impact of adviser and/or product charges, NAV performance or indeed any discount to NAV applied upon sale.