Pension Tax Relief Cuts Fuel VCT Demand

  • On January 27, 2017
  • By Kate Arnold

Source: MoneyObserver

Reductions in the lifetime and annual allowances as well as a lack of availability have contributed to year-on-year growth of 53 per cent for venture capital trusts (VCTs).

Changes to pension rules, which has resulted in both the lifetime (LTA) and annual allowance becoming less generous, has led to a 50 per cent rise in money flowing into VCTs.

Fundraisings for the 2016/17 tax year to 31 December stood at £169.5 million compared to £110.8 million up to the same date the previous tax year, data from the Association of Investment Companies (AIC) shows.

VCTs are collective funds that take stakes in small companies. Shareholders get a variety of generous tax breaks in return for committing their cash to those high-risk investments. Find out more in ourbeginner’s guide to VCTs.

HIGH DEMAND

According to Ian Sayers, chief executive at the AIC, pension rule changes and reduction in the LTA ‘acted as a boost to investor interest’ in VCTs.

Last April the LTA was cut to £1 million, from £1.25 million. As well as higher earners, the cut is expected to impact middle managers with a good final salary (defined benefit) scheme.

Ben Yearsley, investment director at Wealth Club, adds that the reduction in the annual allowance for those earning over £150,000 per year also played a part.

‘Demand is high and will probably increase as more people realise the impact of the pension changes – both to the LTA and the annual allowance,’ he says.

Over a third (35 per cent) of respondents to a survey run by Wealth Club last week said they were planning to either stop contributing or contribute less to their pension; almost two thirds (60 per cent) were considering investing in VCT and enterprise investment schemes.

‘[A] £200,000 annual limit compared to as little as £10,000 for a pension is very enticing,’ explains Yearsley.

He adds: ‘The changes came into effect at the start of this tax year, which could be why there has already been a spike in VCT sales.

‘In addition, there are new innovations in the VCT world, such as monthly contribution VCTs from the likes of Downing and Octopus that are helping bridge the gap between the way pensions were invested, i.e monthly, and the more normal lump sum contributions of the VCT world.’

Another factor that is helping to fuel investment in VCTs this year is a lack of availability of product, according to Yearsley. VCT managers are also currently getting to grips with rule changes that came into effect in November 2015.

Due to this, those that do come to the market tend to sell very quickly. Yearsley gives an example of British Smaller Companies 2, which launched a few weeks ago and sold £4 million in a matter of days.

‘Unicorn AIM VCT launched last week looking to raise £15 million – I expect this to sell in about three weeks… Northern are raising about £13 million next month – again, that will sell in probably a week or so.’

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