Rule Changes Affecting UK VCTs
The argument of David Hall focuses on how rule changes coming from Brussels have had a negative impact on UK Venture Capital Trusts. Hall cites the set of changes announced in the Budget in 2015, which place restrictions on the amount that can be invested, the use of those investment funds and the age of companies that qualify for investment. These changes include a lifetime investment limit of £12 million for each VCT-qualifying company (£20 million for knowledge intensive companies) and an eligibility rule stating that qualifying companies must have made their first commercial sale within the last seven years (ten years for knowledge intensive companies). Hall believes it is important to allow and facilitate investment into a broader range of companies within the UK, and that the age of a company is not important when compared to speed of growth. A relaxation of these rules in the UK will result in more businesses being eligible for venture capital trust investment, thereby encouraging growth.
What is a Venture Capital Trust?
Venture Capital Trusts, or VCTs, were first introduced in 1995 by the government as part of the Finance Act. Designed to encourage investment into new businesses, VCTs are unique in that they offer attractive tax reliefs for investors both when money is invested and when income is received from that investment. You will find a concise overview of VCTs in the infographic attachment to this post, and more information about specific tax reliefs in the accompanying PDF document. VCTs have proved over the past two decades to be much less risky than was originally anticipated. In the tax year from 2015 to 2016, Venture Capital Trusts in the UK raised £458 million.
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Venture Capital Trust Tax Reliefs
Shares in venture capital trusts can be purchased new or second-hand, such as through the stock market. Across all shares, tax relies include exemption from both income tax on dividends for those with ordinary shares and capital gains tax when shares are disposed of. For investors buying new shares, further tax reliefs are available in the form of income tax relief on investments per tax year of up to £200,000 of 30% if shares are held for at least five years. Investors in new shares purchased before April 6th 2004 also benefit from capital gains tax deferral.
Investing in Venture Capital Trusts
The investor profile for venture capital trusts involves a level of comfortableness with risk, as investors can get back less than their original investment. However, the potential returns are higher in exchange for the elevated level of risk. The aim of a VCT is to encourage investors to take on riskier investments in smaller companies that are not listed on the stock exchange, alleviating some of that risk through the pooling of investments and spreading of funds over a number of smaller companies. In theory, shares in venture capital trusts can be sold at any time, but in practice investors need to be able to lock in their investment for a minimum period of five years for new shares. If shares are sold within this five-year period, HMRC are entitled to claim back any tax credit that has already been received. It can also be difficult to sell shares even after this time, as there tend to be fewer buyers for VCT shares than for other forms of investment. Venture capital trusts are not often suitable for novice or hands-off investors as the charges can not only be high but also complex and difficult to understand without in-depth investment knowledge.
The predictions of David Hall paint a rosy picture for venture capital trusts after Brexit, with the potential for a relaxation of rules that could benefit many smaller companies and venture capital investors in the UK over the coming years. However, as with any investment the value can go down as well as up. Potential new investors would be advised to consult an independent financial advisor for help in working out whether this type of investment is likely to meet their needs.
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