Keep calm and carry on
Ian Cowie isn't letting the Budget get him down
Sales of venture capital trusts (VCTs) soared the day after Budget Day 2025, as investors rushed to grab generous tax reliefs before they are reduced next April. But perhaps the best news for a much bigger and more diversified group of investment trust shareholders came in the form of fears for ISAs and pensions that were never realised.
Even Rachel Reeves’ restrictions to cash ISAs and salary sacrifice will not come into effect until April 2027 and April 2029 respectively. So there is plenty of time for shareholders to consider carefully how investment trusts can help us seek capital growth and income, wherever they may arise, and keep more of both beyond the grasp of the taxman.
VCTs saw the most dramatic and immediate response to Reeves’ announcement that the initial or upfront income tax relief which investors currently enjoy will be cut from 30% to 20% with effect from 6 April 2026. Coupled with VCTs’ ability to pay tax-free income, these incentives have helped this formerly somewhat niche sector grow to include no fewer than 39 generalist investment trusts, plus seven that specialise in the Alternative Investment Market (AIM).
Both types of VCT focus on smaller and start-up companies where high risks accompany the potential for high rewards and shareholders must remain invested for at least five years to earn the tax breaks mentioned above. More positively, the average dividend yield of the Association of Investment Companies (AIC) main VCT sector is currently 7% tax-free and the average yield in the ‘VCT Aim Quoted’ is an eye-stretching 8.3% tax-free, according to independent statisticians Morningstar.
“The average dividend yield of the Association of Investment Companies (AIC) main VCT sector is currently 7% tax-free and the average yield in the ‘VCT Aim Quoted’ is an eye-stretching 8.3% tax-free…”
No wonder many higher rate taxpayers decided to buy VCTs while stocks last and Wealth Club, the biggest intermediary focussed on this sector, reported that its sales surged sixfold to £2m the day after Budget Day, 26 November, compared to less than £300,000 in November 2024.
But, as mentioned earlier, smaller companies and startups are often riskier than bigger and long-established rivals, in much the same way that not every acorn grows into an oak. Small businesses tend to be less diversified and more exposed to unexpected setbacks, with smaller contingency funds to cope with them.
These risks are reflected in average total returns from the main VCT sector over the last year, five years and decade of minus 5%, a positive 6% and 52% respectively. AIM VCTs delivered a positive 6%; minus 17% and a positive 27% over the same periods. By comparison, the average investment trust was consistently positive.
“…smaller companies and startups are often riskier than bigger and long-established rivals, in much the same way that not every acorn grows into an oak. ”
That’s why this former VCT investor, and ongoing shareholder in 20 more mainstream investment trusts, suspects that investors will continue to gain from ISA and pension tax shelters. Both will avoid the 2 percentage point increase in taxes on dividends or investment income, arising outside these shelters, that will be imposed at 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers from next April.
Serious savers, such as high earners aiming to catch up with retirement planning, will still be able to set aside up to £60,000 per annum in a pension and avoid any National Insurance Contributions (NICs) on this form of deferred pay until so-called ‘salary sacrifice’ is restricted to no more than £2,000 per annum from April 2029. During the three tax years before then, salary sacrifice will also continue to offer opportunities to avoid the clawback or withdrawal of child benefits that affects parents earning £60,000 or more and the clawback of the personal allowance or slice of tax-free earnings that hits anyone earning £100,000 or more. Carry-back rules can also enable investors to make use of up to three fiscal years’ allowances for unused salary sacrifice payments.
But perhaps the biggest piece of good news in the Budget was what Reeves didn’t say. Fears that she might restrict ISAs and pensions to holding only shares listed in London proved unfounded and both tax shelters remain open for funds and shares which are traded on a wide range of stock exchanges around the world.
Most investment trusts are listed in London and so would have been safe from such a putative restriction anyway. But these trusts’ ongoing ability to give shareholders of all sizes exposure to economies that trade while we are asleep remains an important way of diminishing risk by diversification, as opposed to relying solely on our domestic stock market.
“Investment trusts also enable us to benefit from capital growth and income wherever they might arise on this planet. As events close to home occasionally remind us, British businesses are not immune from political risk or other potential setbacks.”
Investment trusts also enable us to benefit from capital growth and income wherever they might arise on this planet. As events close to home occasionally remind us, British businesses are not immune from political risk or other potential setbacks.
More positively, investment opportunities do not end at Dover. So perhaps we should be most grateful that Reeves kept the ISA and pension tax shelters open for international asset allocation – at least for the time being.
Data correct at 02/12/25.
