Case study based on 2019/20
A business owner, Mr Smith, has established a limited company. Mr Smith’s company chose to pay him a salary of £12,500 per year – which is tax free, as it sits within his personal allowance. In addition to his tax-free salary, after a particularly profitable year for the company, Mr A also stands to receive a £70,000 dividend. £2,000 of this is tax free under the new dividend allowance. The next £35,500 is taxed at the basic rate of 7.5% (tax liability of £2,662.50) and the remaining £32,500 is taxed at the higher rate of 32.5% (tax liability of £10,562.50). This equates to a tax bill of £13,225.
The tax planning solution
We looked at his risk profile, investment time horizon (of more than five years) and attitude towards smaller company investing. Given this, we suggested investing in a Venture Capital Trust (VCT).
In the two decades since they were introduced, VCTs have earned a place alongside pensions and Individual Savings Accounts (ISAs) as a tax efficient investment wrapper with the potential to provide income. These characteristics are proving even more popular with individuals like Mr Smith, following recent changes to dividend taxation.
With a VCT, Mr Smith can claim up to 30% income tax relief on up to £200,000 invested in any single tax year, provided he holds his VCT shares for at least five years. Mr Smith can also benefit from tax free dividends and no capital gains tax to pay when he sells the shares.
The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the VCT maintaining its VCT qualifying status, VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell. These products are not suitable for everyone. Any recommendation should be based on a holistic review of your financial situation, objectives and needs. We recommend you seek professional advice before deciding to invest.