Investments 

Heeding last year’s lessons

This article is part of
Investment Trusts - June 2015

The tax year 2014/15 was a strong one for new Venture Capital Trust (VCT) issues with £429m raised – slightly more than in the previous tax year.

However, VCT-enhanced share buybacks came to an end in 2013/14, meaning 2014/15 was the first year in which they did not feature.

In the previous tax year, more than £17m was raised through enhanced share buybacks. It was deemed that these were not in keeping with the VCT legislation because they enabled investors to receive another round of 30 per cent income tax relief on an existing shareholding without investing any new money, while ending up with a similar number of the same VCT shares.

In the past, many offers covering more than one VCT from the same fund manager gave no choice as to how an investment was divided between VCTs. For the first time last tax year, all such offers gave a choice.

This will in part have been driven by the 2014/15 VCT rule change, meaning upfront income tax relief on a new issue of VCT shares can be reduced (or may be nil) if shares in the same VCT are disposed within six months before or after the issue date of the new shares.

More investors are seeking advice about this and advisers can add value both in terms of choosing a VCT (not just a fund manager) and having an understanding of these new rules.

The year was also characterised by the relative absence of two large fundraisers. NVM did not launch an offer and only one of the Baronsmead VCTs came out with an offer (and a small one at that). This, together with the relatively small size of several other offers, suggests managers were conscious of the amount of uninvested cash sitting in their VCTs.

The small Baronsmead offer closed within a few days, and it is difficult to recall a year in which more VCTs closed early, including offers from Beringea (ProVen), Elderstreet, Maven, Mobeus and YFM (British Smaller Companies). This was due to the limited capacity available and investors investing earlier – a trend that accelerated as more and more offers closed.

The usual pattern at the start of a tax year is that most offers launched the previous tax year that still have capacity remain open. In spite of many offers closing earlier than usual in the run-up to the tax year-end, quite a few are still open now. However, their capacity is extremely limited – most have less than £1m remaining.

So, will we see early launches this tax year? The last Budget announced changes to VCT rules that were in line with, but more generous than, the new EU state aid rules, so it is likely new offers won’t be launched until after state aid approval is granted.

Will capacity be higher this year? Will all managers come out with an offer? This is difficult to predict and will depend on factors such as cash levels, expected realisations, the impact of VCT rule changes and future investment pipelines. Big offers from NVM and Living Bridge (Baronsmead VCTs) might be more likely, given their relative absence last year. New entrants are likely to be few and far between, but if the new rules creating Social VCTs are finalised, it will be interesting to see who launches into this arena.