FTA: In an era of low interest rates and lower-for-longer growth, are VCT/EISs still good for income generation?
PM: The tax free dividends are a huge benefit for VCT’s providing income, but EIS’s does not generally pay dividends (as they are taxable).
The regular exits from a well-diversified EIS portfolio can be used to increase tax free “income” or be utilised for re-investment reducing tax on other income.
FTA: What sort of investments within VCT/EIS portfolios tend to provide the best potential income?
PM: Within old VCTs there are a range of pre-2016 management-buyout style companies, most of which will be profitable and paying dividends to the VCT, which tend passes these onto VCT shareholders.
These can provide some level of dividend cover, however, as these companies mature and are exited, dividends from these companies will not support the VCT dividend to shareholders.
In addition, as the VCT raises more money, these historic assets will be progressively diluted, and replaced by the venture style investments in which Mercia is so well known.
Venture investing is the future of VCTs, and hence the best VCTs will be run by the best venture fund managers.
For that reason, the potential income from VCT and EIS will be parallel in the future, with VCT dividends becoming more “lumpy” and less consistent.
The lumpiness of the VCT dividend will be a result of the sale of companies within the portfolio, as it is already in EIS, reflecting the nature of the underlying asset.
FTA: If the big banks start raising dividends again, which market analysts expect, will we see a slowdown in new money coming into VCTs/EISs?
PM: No, we will not see a reduction in the c£700m going into VCTs each year, or the £2bn going into EISs, as we are seeing both markets maturing.
We are seeing exits being regularly delivered giving investors confidence to reinvest sale proceeds, and bring new investors into the tax-efficient market.
It should also be noted that the freezes on tax rate boundaries, pension life-time allowance, and potential raids on CGT/IHT, all push more investors towards making better use of VCT and EIS as part of their overall portfolio.
FTA: Will VCT/EIS money be what keeps UK entrepreneurs in business post-Covid/Post-Brexit?
PM: For decades, each successive government (Conservative, Labour and coalition) have recognised that UK PLC needs inward investment and this was the main reason for VCT/EIS and, before that, for those with long memories - Business Expansion Schemes.
Although the rules have been changed to stop abuse, the most recent being the changes introduced as a result of the Patient capital review.