George Clelland, Investment Product Manager at Puma Investments, explores how VCTs can be a powerful tax planning tool for retirees, helping to navigate income tax liabilities and future IHT concerns effectively.
Utilising VCTs for income tax relief on pension withdrawals
“As the April 2027 Inheritance Tax changes approach, retirees are increasingly concerned about the tax implications of their pension withdrawals. VCTs present a strategic solution to mitigate these income tax liabilities. With pensions becoming subject to IHT, many retirees may seek to reduce their pension balances, but this often results in significant tax burdens when withdrawing funds. VCTs can help alleviate this issue by offering substantial tax reliefs.
“Investing in VCTs allows individuals to benefit from up to 30% income tax relief on investments up to £200,000 per tax year. This relief can significantly offset the tax due on pension withdrawals, making VCTs an effective tool for tax planning. For instance, a retiree withdrawing £100,000 from their pension could potentially reduce their income tax liability by £30,000 through VCT investments.”
Addressing IHT concerns from the outset
“To avoid both future income tax liabilities associated with pension withdrawals and IHT liabilities for those with significant pension pots, investors may consider directing funds into VCTs instead of pensions from the outset. By leveraging the tax benefits of VCTs, such as income tax relief and tax-free dividends, they can achieve tax-efficient growth, without the complications of future IHT and income tax liabilities. This proactive approach can help investors manage their tax exposure more effectively.”
Additional VCT benefits
“VCTs offer additional tax advantages, including tax-free dividends and exemption from Capital Gains Tax (CGT) on profits. Tax-free dividends can serve as a valuable source of income for retirees, effectively replacing or supplementing the income they would typically receive from pensions. The potential for a steady stream of tax-free dividends could help maintain an investor’s standard of living while providing significant tax savings. When the dividend income is no longer required, investors could explore exiting their VCTs and investing the proceeds into a Business Relief qualifying investment. Or they may wish to gift the proceeds to a beneficiary to start the 7-year gifting clock.”
Tax reliefs are not guaranteed, depend on an individuals’ personal circumstances and a five-year minimum holding period, and may be subject to change.
