Time to consider VCTs?

New research shows half of all high-net-worth individuals have never heard of VCTs. David Prosser discusses why advisers might be missing an opportunity.

Half of all high-net-worth investors have never heard of VCTs and fewer than a quarter have ever made an investment in one, new research from Albion Capital reveals. It says just 24 per cent of the investors it surveyed – all of whom earned more than £125,000 – have bought VCT shares.

Clearly, VCTs aren’t suitable for everyone, but given the high incomes of the investors in Albion’s research, the low level of awareness is disappointing. There’s a real need for advisers to fill that vacuum – the research suggests at least a third of these investors would consider investing in VCTs if their adviser recommended that they do so.

All the more so given the changing landscape of the marketplace. At a time when the rules on tax-efficient savings schemes – particularly in the pensions sector and particularly for higher earners – are becoming less generous, VCTs offer an additional option for long-term savers.

Indeed, while the £20,000 individual savings account (ISA) allowance is a generous benefit to which all investors are still entitled, once this scheme has been fully exploited, the opportunities for high-earning savers start to narrow quickly. While most savers have an annual allowance of up to £40,000 for investing in private pension plans, this cap falls to as low as £10,000 for savers with the highest levels of income. They may quickly break through this level, beyond which punitive tax penalties apply.

VCTs will represent a good solution for increasing numbers of investors worried about this problem. They offer an additional annual investment allowance of £200,000 and a number of generous tax breaks, including 30 per cent upfront tax relief and no income tax or capital gains tax to pay on dividends or profits.

The nature of VCT-qualifying investments is risky, with funds required to invest at least 70 per cent of their assets in unquoted small businesses with assets of less than £15m and fewer than 250 employees. However, while VCT performance may well be volatile, with an increased risk that some portfolio holdings will lose all their value, these are still collective investment funds offering diversification.

Moreover, while there is a minimum five-year holding period for investors – sell up early and you must repay the upfront tax benefit – many will have much longer-term horizons, particularly where VCTs are part of a retirement planning strategy.

In this context, advisers not at least considering the VCT sector for clients who are butting up against ISA and pension contribution allowances may be doing them a disservice. VCTs offer the potential for further long-term tax efficiency, with a wide choice of fund managers with long track records in the sector.

Many intermediaries are enthusiastic supporters of the sector. VCT sales in the 2017-18 tax year were close to record highs, buoyed by support from advisers, despite tweaks to the rules that might be seen as increasing the risk profile of the sector. Indeed, the best funds now tend to sell out, which is a reason not to leave VCT investment until the end of the tax year.

In the end, not everyone, even in the target market, will feel comfortable with VCTs. But more high-net-worth investors need to at least know what the opportunity is here.