Effect on VCTs by the abolition of the LTA

[scotia]

I wonder if the pension changes in the budget - the LTA abolished, and the annual allowance raised to £60k, will effect the popularity of VCTs to those previously restricted by the pension contribution limits. I suspect the popularity of new issue VCTs may take a considerable hit.
And how about SMEs? Could it be bad news for smaller start up companies attempting to raise capital - as the newly eased pension restrictions may see a redirection of investments to larger cap equity.

[Urbandreamer]

While I don't have the kind of income that either limit is relevant, I believe that you can invest £200kpa into VCT's as opposed to £60k into a pension.
There is a 30% tax rebate on VCT's, but income and capital gains are exempt.
With a pension your tax, 20% 40% 45% on contributions is rebated, but tax is charged when you take the bulk of the money.
There is an age restriction when you can access a pension.

I am sure that the changes will affect VCT sales, given that pension contributions can change tax bands, but I suspect less than you assume. They are after all very different products.

[Vulgaris]

I hit the LTA several years ago and have since been shovelling money into VCTs. I won't be tempted back to pensions ---- huge income tax on withdrawals is too much of an impost (I have other income of >£90000 p.a. so pension withdrawals fall right into the 60% trap).

What do tempt me more are EIS, as against VCTs. Experience suggests a £100000 investment will give 50% winners, doubling on average, and 50% losers, halving on average. So (i) the value grows to £125000; (ii) there's £30000 to offset income tax (iii) there's a £25000 loss to boost the radically reduced CGT allowance, and (iv) the holding period is only 3 years, not 5, as for a VCT.

If I can keep rolling £100,000 p.a. I can make myself a non-payer of both income tax and CGT, though I still have a challenge to extract money from a SIPP without regenerating an income tax liability.

I doubt I'm alone in this position or analysis.

[londoninvestor]

What do tempt me more are EIS, as against VCTs. Experience suggests a £100000 investment will give 50% winners, doubling on average, and 50% losers, halving on average. So (i) the value grows to £125000; (ii) there's £30000 to offset income tax (iii) there's a £25000 loss to boost the radically reduced CGT allowance, and (iv) the holding period is only 3 years, not 5, as for a VCT.

Wouldn't (iii) be a £10k loss in your scenario where the losers halve in value? (You recover £25k; the cost basis is the £35k after income tax relief rather than the gross £50k you invested in the losers.)

Certainly don't disagree with your broad analysis though!

[Vulgaris]

Yes, you're correct --- I missed that adjustment.

Needless to say 'half double; half halve' is also very very broad brush

[moorfield]

I hit the LTA several years ago and have since been shovelling money into VCTs. I won't be tempted back to pensions ---- huge income tax on withdrawals is too much of an impost (I have other income of >£90000 p.a. so pension withdrawals fall right into the 60% trap).

...

If I can keep rolling £100,000 p.a. I can make myself a non-payer of both income tax and CGT, though I still have a challenge to extract money from a SIPP without regenerating an income tax liability.

I doubt I'm alone in this position or analysis.

Indeed, while the LTA announcement yesterday was eye-catching, the problem of tax efficient withdrawal remains - and behind that the "25%" tax free element has been effectively dropped, replaced by a maximum limit of £268,275. So those with very large pots, £2m, £3m etc. now find that tax free amount becomes 12.5%, 8.3% and so on. What a Canny Hunt.

[Kidman]

Indeed, while the LTA announcement yesterday was eye-catching, the problem of tax efficient withdrawal remains - and behind that the "25%" tax free element has been effectively dropped, replaced by a maximum limit of £268,275. So those with very large pots, £2m, £3m etc. now find that tax free amount becomes 12.5%, 8.3% and so on. What a Canny Hunt.

What is the history of the '25%' tax-free element?
It has always seemed odd when all other withdrawls from one's pension pot(s) are taxable.
To compicate matters more I seem to remember there is some rule that if one doesn't take the tax-free cash before age 75 then it becomes taxable, at least in certain circumstances such as death.

I remember decades ago as people approached retirement they decided on their cruise of a lifetime, paying the mortgage off etc with the 25% cash.

[UncleEbenezer]

What is the history of the '25%' tax-free element?

It was a reduction from the 50% tax-free element older generations enjoyed. Not quite sure when it changed.

Though I'd guess there weren't too many getting the 50%. The generations who qualified (born 1950s or earlier) were also the ones with those nice final salary pensions, and perhaps fewer than those retiring today or in future with cash-value pensions.

[james188]

When I reached the then applicable LTA some years ago, I decided to put my SIPP into drawdown. Each year, I have withdrawn sums (thereby creating additional taxable income) to prevent the capital value of my SIPP increasing. I have then invested the SIPP proceeds (together with other cash) into VCTs. The tax relief generated by the new VCT investments materially reduces/wipes out the net amount of VAT that I pay. So, if you are happy with the risk profile of VCTs compared to investments in your SIPP (and I am) this is one way of efficiently realising sums in your SIPP.

[james188]

Correction. Make that “income tax”that I pay, not VAT.

[moorfield]

I think with Labour Party already playing Musical Pension Limits today, VCT subscriptions will remain strong...

[scotia]

I think with Labour Party already playing Musical Pension Limits today, VCT subscriptions will remain strong...

Interesting - during the last Labour Government the LTA steadily increased to £1.8M - it was the Conservative Government that steadily reduced it to just over £1M. And I think (correct me if I'm wrong) that Gordon Brown's £1.8M LTA allowed a 25% tax-free extraction. Now if the current government had simply updated the £1.8M to £3.6M for inflation, and kept the 25% tax free lump sum - they could have simply argued that they were following Labour policy
However getting back to my main point about the attraction of further pension investments compared to VCTs, I confess that when I wrote it, I had not noticed that the pension tax free sum had been frozen at 25% of the current LTA. That makes the abolition of the LTA much less attractive - as Vulgaris and yourself have noted. Back to square one.