Finally, there is no CGT liability on death, instead your estate maybe subject to inheritance tax. Therefore, not selling an investment and holding it until death would eradicate any potential CGT on disposal, and if your estate is within the inheritance tax nil rate band, your estate would not pay inheritance tax either.
Case Study – Meet Tony, a director of a design company
Tony earns a large salary and good annual bonuses. He has accumulated significant savings in ISAs and contributes large amounts into his pension each year. Tony has a large annual tax bill and is interested in other government endorsed ways to reduce the amount of income tax he pays.
Following discussions, a recommendation is made suggesting Tony invests £50,000 into VCTs. In year 1, Tony can claim £15,000 income tax relief. If Tony invests a further £50,000 in year 2, Tony can claim a further £15,000 income tax relief.
A VCT must be retained for 5 years, otherwise Tony will lose the income tax relief he has received.
Whilst invested in VCTs, Tony will also benefit from tax-free dividends, and there is no capital gains tax to pay when Tony ultimately sells his shares.
In year 6, after Tony has held his first VCT investment for 5 years, he can choose to sell his shares without forfeiting the income tax benefits he has received. The proceeds of sale could then be used to invest into another VCT, attracting more income tax relief.
If Tony made a series of investments over each of the first 5 years, in year 7 Tony could also sell and reinvest his year 2 investment and again claim further income tax relief. The same would apply in future years.
VCTs are classified as high risk investments typically investing in unquoted shares which may make them difficult to dispose of. The availability of various tax reliefs should not cause you to overlook the risks inherent in such structures and you may not recieve back all the capital you invest.