Using VCTs to make rental income tax-efficient for landlords

The Challenge

With mortgage rates having risen from historic lows over recent years, many landlords are facing a dilemma, as their rental income results in an income tax burden. This income can’t be put directly into their pension, while selling the property would trigger an unwelcome capital gains tax bill.

Emma owns a portfolio of buy-to-let properties that currently generates an annual income of around £60,000 (after any allowances and deductions). Her property portfolio is her only source of income. At present, Emma’s income from her property portfolio is taxed as follows:

• She can claim a £1,000 tax-free property allowance
• She pays income tax on the remaining £59,000 of income
• This leaves Emma with an annual income tax bill of £11,032

The Solution

Emma discusses her situation with her financial adviser, who tells her that through a Venture Capital Trust (VCT), property owners can claim tax relief on their rental income. Emma’s adviser talks through the benefits and the risks of investing in a VCT, and explains if she made an investment of £20,000 into a VCT, she would be able to claim 30% income tax relief on her investment. This equates to £6,000, provided she holds her VCT shares for the minimum five-year holding period.

As a result of her investment, Emma reduces her income tax liability from £11,032 to £5,032. Also, because most VCTs target annual dividends, Emma can expect to receive an annual tax-free income from her investment, and there’s no HMRC requirement for Emma to declare VCT dividends on her tax returns.

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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