The forthcoming Autumn Budget is set to change the rules around the sort of assets into which venture capital trusts (VCTs) can invest, prompting one provider to suspend a fundraising.
A consultation paper published HM Treasury in August, entitled Financing Growth in Innovative firms, expressed concern that “capital preservation” is central to the focus of too many VCT investments.
Investors in VCTs receive a 30 per cent upfront tax break, if they hold the shares for five years.
In addition, any capital gains or income received from investments is free of tax, even when held outside an Isa.
The government's aim for VCTs is to encourage more capital into riskier assets, so funds investing for "capital preservation" are considered not to be meeting the requirements set by policymakers.
As a result of this Albion Capital, a VCT provider, has suspended the fundraising for Albion VCT, one of the six vehicles it runs.
The company said the decision was made in light of ongoing discussions that led them to believe rules for investment in asset-based businesses is set to be changed.
A spokesman for Albion said it regards asset-based investments as companies such as schools, hospitals and restaurants, where property is a key part of the operation of the business.
The Albion VCT has a focus on asset-backed businesses.
The other five VCTs in the Albion range continue to fundraise and will deploy the capital in companies growing in areas such as technology.
A spokesman for HM Treasury said they would not comment on speculation about the contents of forthcoming Budgets.
The spokesman confirmed HM Treasury is engaged in an ongoing review of capital markets (The Patient Capital Review) which is examining whether the various tax reliefs, including VCT tax reliefs, are well targeted and delivering value for money for taxpayers.
Any changes announced in the Autumn Budget, which will take place on 22 November, would be the second set of new regulations with which the VCT sector has had to deal in as many years.
In 2015 the government decided that management buyouts and also investments in renewable energy would no longer be permitted into VCTs, as they were considered to not any longer be in need of risk capital to justify the tax breaks.
Will Fraser Allen, partner and fund manager at Albion Ventures, said the rules introduced two years ago have probably worked if the aim was to drive capital into risk assets.
Jason Hollands, managing director at Tilney Group, said: “It is clear the government wants VCTs to be focused on growth company investing, with a skew towards riskier, younger businesses and therefore it appears that as the industry has stepped up dialogue that expectations are growing of a potential tightening of the criteria around asset-backed deals to ensure VCTs are focused on growth investing.”
He said any changes would likely hurt the "limited life" VCTs, that is, those with a pre-agreed date until they close the company and distribute the assets to shareholders.