Tax Efficient Investments  

Understanding the latest VCT shake-up

Understanding the latest VCT shake-up
 The chancellor has again rewritten the rules for VCT and EIS investors, creating new challenges and opportunities for intermediaries

First established by the government in 1994-95, venture capital trusts (VCTs) and enterprise investment schemes (EISs) have since become a major draw for investors and can form an important part of the intermediary’s toolkit. But a key element of the products’ appeal – a generous helping of tax relief – has meant they have increasingly attracted the attention of the chancellor.

Each Budget brings with it fears that favourable tax conditions detailed in Table 1 could be taken away, or onerous new rules put into play.

These anxieties are not entirely unfounded. As recently as 2015, rule changes made it harder for VCT managers to find qualifying companies to invest in. EIS vehicles have faced their own constraints – the schemes were barred from investing in renewable energy in early 2015.

Table 1: Tax relief for EISs and VCTs

SchemeAnnual amount individuals can claim relief on, under new rulesIncome tax reliefMinimum qualifying period for share reliefTax payable on dividends
Enterprise investment scheme£2m30%Three yearsYes
Venture capital trust£200,00030%Five yearsNo
Source: HMRC. Copyright: Money Management

The latest Budget, delivered in November, has left tax-efficient investors with a fresh set of changes to digest. The government’s latest approach has met with a warm response from industry figures. But it brings a range of challenges and opportunities for intermediaries.

Skin in the game

The measures unveiled by Philip Hammond seek to encourage support for potentially high growth, “knowledge-intensive” companies, operating in sectors such as technology, while ensuring that EIS and VCT structures are not “used as a shelter for low-risk capital preservation schemes”.

This involves a combination of carrots and sticks. In the first category, the government will double the amount an individual can invest in knowledge-intensive businesses via EIS each year to £2m. The amount of money that such firms can receive from VCT and EIS structures will also double, to £10m a year.

On the other side of the approach is a plan to introduce a new test, which will “reduce the scope for and redirect low-risk investment” out of the VCT and EIS space.

Some of these changes should be of little concern to intermediaries. The increased amount businesses can receive from such funds will have little direct effect, while the doubled allowance for EIS investment is only likely to be of relevance to the very upper echelons of the private client world. According to HMRC figures, just 150 people invested the entire £1m allowance in 2015-16.

“The big headline was the doubling of the EIS allowances for knowledge-intensive companies,” explains Tilney managing director Jason Hollands. “[But] these are a narrowly defined type of business with high levels of [internal] investment, and in reality this will be of interest to a handful of very wealthy business angels rather than clients of advisers.”

Testing times

The most important news for clients is the introduction of the low-risk test, which will use a set of principles rather than strict rules or exclusions to make sure tax-efficient investors are backing riskier ventures. Advocates have played down the change, saying the measure has offered a greater level of certainty for the VCT and EIS sector.

Alex Davies, of Wealth Club, which caters for high net-worth individuals and sophisticated investors, says this move was viewed as “unexpectedly positive” for the industry.

“It had been widely rumoured that certain types of EIS and VCT, such as those that had assets, could be banned,” he adds. “There were also concerns tax relief might be restricted. Neither of these things happened.”