The recently announced dividend tax rise is likely to increase demand for investment into venture capital trusts (VCTs), expert say. This is because VCTs can offer a 30% income tax relief on an allowance up to £200,00 per year. Returns, which are paid through dividends, are also tax free. As a result, investment into VCTs could be a solution to cut taxes and be especially attractive for high earners. If you are a high earner, once you’ve put as much as you can into a pension and ISA, VCT investment is one of the last remaining bastions of tax efficiency and an obvious next step. The fact VCT dividends are tax free is hugely valuable and will be even more so once the new rate of dividend tax comes in next April. Commentators also believe the dividend tax increase could also see existing investors increase their allocations. This applies particularly to business owners who pay themselves with dividends, but also to many other investors looking to generate income from their investments. The squeeze on incomes has encouraged more people to consider tax efficient investments. This is because things like buy-to-let have become less attractive and the tax-free dividend allowance has slowly been reduced. It also helps that VCTs have performed well over the last few years, in part due to the rule changes on where VCTs can place investment. They can now invest in fast-growing tech-enabled companies whose business models have prospered as a result of the pandemic. Much of this growth has eluded companies listed on the main stock market. However, it is important to bear in mind that VCTs are high risk investments focused on early stage, small and illiquid companies, so they certainly won’t suit everyone.
First sub 1% mortgage for landlords
Landlords can now benefit from the price war between mortgage lenders, with Nationwide’s the Mortgage Works launching the first sub-1% buy-to-let products. Cash-flush lenders have been shattering records for owner-occupied mortgages since the summer, with Platform recently launching a previously unthought-of 0.79% two-year fix. The erosion of rates has pushed buy-to-let mortgages to new lows too, with headline-grabbing deals from Nationwide and Co-operative Bank’s Platform. But make sure you read the fine print because these mortgages don’t make financial sense for all property investors. Nationwide Building Society’s buy-to-let arm The Mortgage Works is the first lender to break the 1% barrier. It’s offering a two-year fix at 0.99% to landlords with at least a 35% deposit. Previously the best rate available to landlords was 1.16% from Barclays. The catch with The Mortgage Works’ deal is a hefty fee, the equivalent of 2% of the loan amount. For example, a landlord purchasing a property for £300,000 would have to produce £3,900, before valuation fees. For comparison, the Barclays mortgage comes with a product fee of £1,549. While product fees for buy-to-let mortgages are generally above those for homeowner loans, a 2% surcharge is very onerous. It makes The Mortgage Works’ product only sensible for those borrowing small sums. Those borrowing more should consider a product with a flat fee, such as a nearly-matching 1% offer from Platform, the buy-to-let arm of the Co-operative Bank. The product fee with this two-year fix is £2,450. The catch here is that it’s only available on property purchases of between £350,001 and £500,000 and the buyer must have a household income or at least £60,000. They also can only have a buy-to-let portfolio of a maximum of three properties and will need a 40% deposit. Both mortgages are available for both purchase and re-mortgage.
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