Venture Capital Trusts  

Can VCTs beat the capacity crunch?

  • Gain an understanding of the current state of tax-efficient investing
  • Be able to understand why tax-efficient investing is on the rise
  • Comprehend future prospects for VCTs and EIS's.

Investors also pay no income tax on dividends from ordinary shares, and no capital gains tax is due when individuals decide to sell their ordinary shares in VCTs.

Similarly, EISs are also frequently in focus for tax-efficient investors. They can claim a 30 per cent tax relief on up to £1m worth of shares. Shares are also eligible for a capital gains tax exemption, as well as capital gains tax deferral relief, and investors who sell their shares at a loss can offset this, minus any income tax relief given, against income in either the year in which they were disposed of or the previous year.

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Tax benefits

These tax benefits, in combination with the tighter limits on pension tax relief, have resulted in a surge of inflows into VCTs and EIS.

VCT fundraising in the 2016/17 tax year to the end of February 2017 was £270m, compared to £204.4m during the same period in the previous tax year, according to data from the AIC.

The spike in the 2004/05 and 2005/06 tax years seen in Chart 1 is due to upfront VCT tax relief being raised to 40 per cent, although it was subsequently reduced back to 30 per cent.

There is however a snag in the recent success. Rule changes from 2015 have made it more difficult for VCTs to find qualifying companies to invest in. Under the new rules, companies will normally have to have made their first commercial sale in the past seven years – or 10 years for companies that are deemed to be knowledge intensive. In addition, money from VCTs cannot be used to fund management buyouts and acquisitions.

High barriers to entry and limitations from the rule changes have hampered prospects for new VCT launches, as have the fact that many investors would rather put their money into more established companies or funds, says Lauren Radford, head of business management for tax-advantaged investments at Allenbridge.

“Unfortunately, there are significant headwinds and a competitive disadvantage for new VCTs coming to market. Even raising new funds for existing VCTs is hampered by the current rules and restrictions,” Ms Radford notes.

Since companies that are eligible for VCT and EIS inclusion are in the early stages of development, they often offer significant potential for growth.

Ryan Hughes, head of fund selection at AJ Bell, notes the vehicles can come in a variety of forms, but most tend to have the underlying theme of rapid advancement.

“We see a wide variety of different investment strategies ranging from restaurants, healthcare, fitness and media. All of the focus is on high-growth sectors that reflect the changing attitudes of UK consumers.”