VCTs Surge Ahead of Dividend Tax Increase

The dividend tax rise announced last month is likely to increase demand for venture capital trusts (VCTs), expert say. This is because VCTs can offer a 30% income tax relief on an allowance up to £200,00 per year.

Returns, which are paid through dividends, are also tax free. As a result, VCTs could be a solution to cut taxes and be especially attractive for high earners.

If you are a high earner, once you’ve put as much as you can into a pension and an ISA, VCTs are one of the last remaining bastions of tax efficiency and an obvious next step. The fact VCT dividends are tax free is hugely valuable and will be even more so once the new rate of dividend tax comes in next April.

Commentators also believe the dividend tax increase could also see existing investors increase their allocations. This applies particularly to business owners who pay themselves with dividends, but also to many other investors looking to generate income from their investments.

The squeeze on incomes has encouraged more people to consider tax efficient investments. This is because things like buy-to-let have become less attractive and the tax-free dividend allowance has slowly been reduced.

It also helps that VCTs have performed well over the last few years, in part due to the rule changes on where VCTs can invest. They can now invest in fast-growing tech-enabled companies whose business models have prospered as a result of the pandemic.

Much of this growth has eluded companies listed on the main stock market. However, it is important to bear in mind that VCTs are high risk investments focused on early stage, small and illiquid companies, so they certainly won’t suit everyone.