U.K. smaller companies in ISA versus VCTs

GreasyPalms

If I have an allocation to U.K. smaller companies in my ISA, is it worth putting that amount into a VCT instead to benefit from the tax relief? I never really considered VCTs as I thought them too risky but I happened to notice the Amati VCTs have very similar holdings to their U.K. smaller companies fund, which I decided to invest in inside my ISA. I intend to keep this money invested for 20+ years. I would only benefit from 20% tax relief as anything I earn over the HRT threshold goes into my pension. I know they have higher charges though which could work out more than the tax relief over the years? Would love to know your thoughts? Cheers!

Linton

GreasyPalms wrote: »

If I have an allocation to U.K. smaller companies in my ISA, is it worth putting that amount into a VCT instead to benefit from the tax relief? I never really considered VCTs as I thought them too risky but I happened to notice the Amati VCTs have very similar holdings to their U.K. smaller companies fund, which I decided to invest in inside my ISA. I intend to keep this money invested for 20+ years. I would only benefit from 20% tax relief as anything I earn over the HRT threshold goes into my pension. I know they have higher charges though which could work out more than the tax relief over the years? Would love to know your thoughts? Cheers!

No - you will get 30% tax relief. In your case that will include tax relief for some of the income you didnt put into VCTs.

Note that the 30% tax relief only applies if you buy new issues of VCTs. Buying VCTs on the stock market doesnt work. So you may have to wait to buy a specific VCT.

TheTracker

Linton wrote: »

No - you will get 30% tax relief.

The way I think of it is you claim 30% income tax relief on the amount invested, which can be used as a rebate against the income tax paid on earnings, which for many people is 20% of much of their earnings. At least in my mind, it is the avoided income tax (20%) that the relief is applied against which frames the benefit for most tax payers, rather than the rate at which relief is attracted (30% of investment) that matters. Most articles and upfront hmrc guidance just say “30% income tax relief” which I believe is only part of the story. The key word in the OP is “benefit”. So you’re both right. Also remember the value of the initial VCT investment may fall (or rise), reducing the net benefit after 3 years. I welcome any corrections.

To the OP. Re ISA. Don’t forget to account for the lifetime of tax relief on any dividends and capital growth from the sheltered ISA investment, which could outstrip the avoided income tax you’d get through VCT once only. It’s for this reason I would generically guide to use ISA allowance before VCT/EIS exposure.

GreasyPalms

Thanks both! Aren’t VCTs exempt from income tax on dividends and capital gains tax as well though, tracker?

TheTracker

GreasyPalms wrote: »

Thanks both! Aren’t VCTs exempt from income tax on dividends and capital gains tax as well though, tracker?

While you hold them.

pip895

The "safer" VCTs are generally second hand and I don't see the point of holding them in an isa as you are free of income & CGT anyway??

If you have to hold funds outside an ISA i.e. you have used up your full allowance then perhaps worth a look, although the charges can be a bit eye watering!

GooeyBlob

You could always stick with the UK Smaller Companies fund in your ISA and max that out first then look at VCTs after that. For diversity you might want to look at other established VCTs though, there are plenty of good ones about.