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Home > Investments > Tax Efficient Investments

From Special Report: Investment Trusts - May 2012

IFAs take fresh look at VCTs

More IFAs are looking at income-paying VCTs as part of their clients’ retirement planning.

By Jenny Lowe | Published May 08, 2012 | comments

Fundraising in the venture capital trust (VCT) sector broke through the £300m mark for the third year in a row in the past financial year, although it failed to live up to the fundraising standard of 2010/11.

Figures published by the AIC, which include enhanced buybacks, show that £330m of new shares were issued by the VCT sector during the 2011/2012 tax year, compared to £365m in the 2010/11 tax year. It was the sixth highest amount since VCTs were launched in 1995.

Further data from Foresight, however, shows £262m was raised if buybacks were excluded.

The provider raised £40m in its own VCTs – £30m for shares in its Infrastructure VCT, £8m for Foresight Solar VCT and more than £2m in top-up funds for its stable of four existing VCTs.

Mike Currie, partner and sales director at Foresight, says: “Our Infrastructure VCT share class has been extremely popular with investors this year. With the endorsement of [the] Tax Efficient Review, which granted it the highest ranking for VCTs this fundraising season, infrastructure is the asset class of the moment, with its combination of diversification, steady yield and capital preservation.”

On January 12 2012 Baronsmead VCT, alongside Baronsmead VCTs 2, 3 and 4, launched its own offer for subscription to raise up to £4.14m per company, before expenses, and £16.54m in aggregate. By February 7 2012 these offers were fully subscribed.

According to Baronsmead, it is the intention that the shareholders of each company will receive dividends twice a year, as dividends are normally paid with respect to the half-year and final results. It is anticipated, therefore, that investors who invest in each of the four offers will receive two dividend payments four times a year.

David Thorp of Baronsmead VCTs says: “It is the sale of successful investments in UK growth SME companies that generates the profits from which high and steady dividends can be paid. Many shareholders who invested in 1995 have stayed the course and dividends have been part of the glue over the longer term. Shareholders have told us that VCTs play an important part of their retirement planning.”

Regulation

The rules surrounding VCTs, however, make them even more complicated for advisers than other closed-end funds. The UK was due to introduce new provisions for VCTs, but the sector expressed relief after the Treasury postponed them.

The new rules will cap at £2m the amount that can be invested in a small business by schemes such as VCTs, enterprise investment schemes and seed enterprise investment schemes in any 12-month period. The decision removes the threat that VCTs making investments in the next few months might automatically lose their tax status if they fall foul of this provision.

The initial decision, made public in the March Budget, had threatened the pipeline of investments that VCTs were in the process of making over the following few months, as the Financial Services Bill makes provision for up to £5m of funding that VCTs and similar schemes can invest in UK enterprises.

The AIC raised this issue with HM Treasury as a matter of urgency, as it was originally intended that the new provisions would apply to all investments made from April 6 2012.

Ian Sayers, director general at the AIC, says: “The Treasury quickly recognised that introducing these rules at short notice would have created problems for VCTs seeking to invest in small businesses in the next few months. It agreed that this would be unhelpful at a time when UK SMEs are struggling to find reliable sources of funds.

“The government’s response to industry concerns shows its commitment to supporting the venture capital sector and will provide more time for small businesses and investors to plan how they will deal with the limit.”

According to Mr Sayers, the limit itself is also currently under review, with the government pushing for it to be raised to £5m.

He adds: “Such an increase is dependent on the approval of the European Commission. These negotiations are, by their nature, complicated and time consuming.

“Nevertheless, we are confident that the government is committed to this process and we very much hope this increase can be achieved. Increasing the limit would provide additional support to small businesses.”

In spite of the overhaul, Matthew Brown, partner at Ram Capital Partners, says “advisers are interested in learning what is happening, in order to explain it to their clients”, rather than being put off the sector altogether.

He adds: “With some advisers’ clients uncertain [as to] whether they can or indeed wish to make further pension contributions, more and more IFAs are looking at income-paying VCTs to supplement income pre and post-retirement.”

Jenny Lowe is features editor at Investment Adviser.

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