Venture capital trusts (VCTs) saw further changes such as scaling back the age requirements for qualifying companies and a reduction of the lifetime limit for tax-advantaged funding in the summer Budget.
Companies will be eligible for VCT investment within seven years of their first commercial sale, and 10 years for knowledge-intensive companies – down from 10 and 12 years respectively, previously stated in this year’s March Budget.
Tax-advantaged funding for VCTs will now be restricted to a lifetime limit of £12m and £20m for knowledge-intensive companies, compared with £15m stated earlier this year.
Existing VCTs will no longer be able to reinvest funds raised from exits into businesses that have previously been eligible at the time of funding. This means these proceeds will need to be returned to shareholders as special dividends, or reinvested in companies that comply with the new restrictions.
The March Budget had already tightened the rules around investments that qualify for VCTs and EISs in an effort to ensure they are compliant with European State Aid rules. But Ian Sayers, chief executive of the Association of Investment Companies (AIC), voiced his confidence that the VCT sector can withstand changes made to the trusts, and welcomed the government’s commitment to ensuring that VCTs gain European state aid clearance.
The changes to the lifetime allowance may be unlikely to deter private investors, but will put a ceiling on the level of support a VCT can offer an investment company, according to Annabel Brodie-Smith, communications director at the AIC. She added, “The age requirement will put a focus on younger companies, although this is an area where VCTs are already active. Investors will still benefit from a diversified portfolio of small and growing companies, but will want to bear in mind that VCTs will not have the same scope that they’ve had in the past and the risk profile may change.”
VCTs could experience a demand increase following the changes affecting pension tax relief for high earners, also announced. The trusts also could benefit from the changes to the taxation of dividends, as VCT dividends are tax-free.
As they invest in small companies to foster their growth, VCTs have been praised for their potential to help create jobs and promote growth and productivity in the economy.
