VCT providers are warning that legislation in the Finance Bill will prevent new players entering the generalist VCT market and will force existing providers to change their business models.
At least 70 per cent of a VCT must be made up of qualifying investments.
The new legislation states that money raised by a share issue to be used for acquiring shares in another company will no longer be counted as a qualifying investment.
The exclusion of share acquisition as a qualifying investment will only apply to money raised by a VCT on or after April 6.
Generalist VCT providers often carry out management buyouts, where the VCT buys out the owners, keeps the same management team in place and lets it run the business.
Generalist VCTs will buy shares in the business and sometimes debt in order to provide a yield for investors.
Matrix managing director Mark Wignall says the rule will kill new entrants to the generalist market.
He says: “New entrants will not have the ability to use money raised before April 2012 to fund share acquisitions. You can argue that is of benefit to us in terms of less competition.”
Wignall says Matrix may have to change its business model in the long-term. He says: “Under a new model, we would buy the business and its assets, rather than its shares.
“This route of buying is less tax-efficient to vendors, though, so a buyer using this model is at a significant competitive disadvantage to a buyer purchasing shares.”
Downing partner Tony McGing says: “A lot of the generalists VCTs carry out MBOs, so the change is not ideal for the VCT industry. It will stop new entrants coming into the generalist market.”