It is possible to build a lifetime tax reducing system with VCTs.
If you invest in a VCT for five years, you will have received tax relief for each of those five investments, and then you can encash the first one in the sixth year, receive the money without tax to pay, and invest this in a different VCT and get another 30% tax relief on the same money.
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Here’s how it would work, for Mr Smith, an employee who earns £68,930 per year.
An income of £68,930 gives him an income tax liability of £15,000.
To avoid this he invests in a VCT called Acme Ltd VCT. This means any tax he has paid, he will get back.
In year 2, he does exactly the same.
In years 3, 4 and 5 he repeats the process.
He now has £250,000 invested in the Acme Ltd VCT. And he has saved £75,000 in income tax over the previous five years.
In year 6 he sells his first Acme VCT which he invested in year 1. This comes out with no income tax to pay.
Then he puts it in a different VCT called the Globex Ltd VCT – this takes £15,000 of his tax bill in year 6 as well!
Mr Smith now has £250,000 invested in VCTs and has had £75,000 back in tax over the past 5 years.
And he can continue to do so for the next 5 years (and for as long as he remains a tax payer!)