‘I saved thousands of pounds in tax using venture capital trusts’

Richard Parry explains why he invests in venture capital trusts despite the risks that come with it.

Retired RAF pilot Richard invested in his first venture capital trust in 2011.

He bought £22,000 of shares in a venture capital trust, which resulted in a tax rebate of £6,600 that year.

What is a venture capital trust?

Venture capital trusts (VCTs) are funds that invest in small, unquoted companies with the aim of helping them to grow.

They are risky. The businesses that the VCTs back may not turn a profit or could go bust, plus VCT shares can be more difficult to sell if you need your money suddenly.

If you’re looking for a less risky way to invest, you might want to read our beginner’s guide to investing.

The upshot of VCTs is the generous 30% income tax relief for those putting money into VCTs, hence Richard’s £6,600 tax break.

On top of that there is no capital gains tax to pay if investors sell their shares and make a profit. In addition, dividends are tax free.

Find out: How much is capital gains tax?

Investing in venture capital trusts

In total, the 71-year-old from Tenbury Wells, Worcestershire, has invested just under £100,000 across a range of generalist venture capital trusts.

Most people claim their VCT tax relief via their tax return. However you can write to your local tax office, enclosing your VCT certificate and a copy of your P60 if you have one.

HM Revenue & Customs will then either adjust your tax code or give you a tax refund.

In spite of the risky nature of the investments and the careful management required to maximise the tax reliefs, Richard says he definitely rates VCTs but “only if you do your homework”.

The cash he makes on VCTs helps to fuel an unusual hobby. Richard is a keen hot air balloonist and travels to France, Spain, Luxembourg and Japan for events.

He won the Queen’s Cup in 2013, the UK’s oldest sporting prize, after flying farther than any of his rivals during the two day event.

If you would rather buy more traditional types of investments, here are the top stocks and shares ISAs according to our independent ratings.

How he got started with venture capital trusts

Richard bought his first VCT with Chelsea Financial Services in 2011 for £22,000 and the VCT relief was calculated at £6,600 (30% of the investment).

“Analysing information before buying a VCT every year is something I prioritise,” says the former pilot, who has three children and two grandchildren.

“I also think about how I am building my finances and how a VCT could feature in the overall picture. I have fingers in many pies – two pensions, rental income, investments and ISAs.”

What worked when investing

• Using a knowledgeable broker. Chelsea offers a good service. It has a monthly magazine with detailed information.
  
• Being wary. I also use the investment platform Trustnet to compare all VCTs.
  
• You have to buy before April [in the run up to the end of the tax year]. The good ones go quickly. They are like share offers – once they’re gone, they’re gone.
  
• You have to lock your investment in for at least five years to keep the tax relief. 

• Taking other financial experiences into consideration, I really rate VCTs. I was stung by fund manager Neil Woodford suspending his funds, and the poor performance from Fidelity’s Anthony Bolton, for example. And while rental income is good, the management of a property is difficult. 
  
• VCTs have a higher annual contribution limit than pensions. The maximum amount you can invest in VCTs each year and claim income tax relief is £200,000. For pensions it is 100% of your income or £40,000, whichever is lower.
  

And what didn’t work

I do sometimes make mistakes

In the previous tax year, I miscalculated my income (made up of state pension, RAF pension, rental income and investments). This in turn affected my VCT purchase.

After deducting expenses, my rental profit was £5,500, so I’d normally have had to pay £1,100 in tax. I bought a VCT for £6,000 to offset it and some other tax liabilities.

However, dividends from my investments were higher than I expected, and I paid myself £20,000 from a property building project.

This pushed me into a higher rate tax bracket. In hindsight, I should have bought a £10,000 VCT.

Over-estimating my taxable earnings

By contrast, in 2014 I made a mistake by investing £10,000 in a VCT. I had over-estimated my taxable earnings so only got a refund of £500, rather than the potential £3,300.

However, it has paid me £6,000 in dividends since then and is currently worth £14,000. As a well-known supermarket would say, every little helps!

It can be tricky doing your tax return

The UK tax system is inordinately complicated and full of gotchas.

In order to fully exploit the tax advantage of a VCT one needs to know in advance how large one’s tax bill will be. It’s a difficult task, especially for a layman.

*This story was written in July 2020 and updated in August 2021