3 min read The Challenge
High earning clients can still find themselves facing financial challenges, or with liquidity needs in the not-too-distant future. For example, Reuben is a 42-year-old Finance Director with an annual salary of £150,000.
Reuben recently received an annual bonus of £50,000.
He initially considered putting that money into his pension, but while he knows this is probably the most tax-efficient option available to him, he is mindful that any large sums placed into his pension won’t be accessible until he turns 55. He would prefer not to tie up his money for that long.
The Solution
Reuben discusses his situation with his financial adviser, who talks through the benefits and the risks of investing in a Venture Capital Trust (VCT).
Reuben’s adviser tells him that if he invested the £50,000 into a VCT, he would be able to claim up to 30% income tax relief on the investment, equalling £15,000, provided Reuben holds his VCT shares for the minimum five-year holding period.
Also, as most VCTs target a dividend, Reuben can expect to receive an annual tax-free income from his investment. VCT dividends are completely tax-free and there’s no HMRC requirement to declare them on tax returns.
The potential for regular tax-free VCT dividends could prove especially attractive for high earners like Reuben, as the tax-free dividend allowance was reduced to just £500 on 6 April 2024. An additional-rate taxpayer would need to receive an annual gross income of more than 8% from a unit trust or investment trust to match the income earned from a 5% tax-free VCT dividend.
Investor’s capital is at risk.
For simplicity, this illustration does not take into account investment growth or charges for the investment. It is based on the current tax rules and personal allowances as at September 2024, which could be subject to change and depend on individual circumstances. Tax reliefs depend on a VCT maintaining its qualifying status and target returns may not be guaranteed.
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