This month we take a look at the planned exit VCTs reaching the end of the five-year minimum holding period.
In tax year 2006/07 the initial tax relief for VCT investors was reduced to 30 per cent from 40 per cent and the minimum holding period was raised from three years to five years. This means we are starting to see the planned exit VCTs launched in tax year 2006/07 coming out of the minimum five year holding period, after which the VCT shares can be sold without any claw-back of the original 30 per cent income tax relief.
The past five years have proved a challenging time for the planned exit VCT investment model in a number of ways:
• Launching in tax year 2006/07 meant VCTs were investing at the peak of the market.
• Some VCTs held off investing but this meant investee companies then had less time to create potential growth.
• The drop in interest rates has impacted the return that could be made on cash held by the VCTs. The contribution from cash should have contributed to help pay for the VCT running costs of around 2.5 per cent to 3 per cent per annum.
• Some VCTs have had to take write-downs on investments.
• The drying up of bank finance means refinancing to convert VCT loans to cash has been virtually impossible and has not been helped in some situations by reductions in underlying asset values and lowering of lender loan to value ratios.
• Holdings in unquoted companies are taking longer to unwind.
The overall effect is that total returns are lower than anticipated and some VCTs will take longer to return cash to investors.
To help investors, Downing and Edge propose an Enhanced Share Buy-back scheme. An ESBB allows investors who can commit to being invested for a further five years to effectively swap out their current holding for new shares on which they can claim the upfront 30 per cent income tax relief. This is not an exit opportunity for investors.
In most cases shareholders should consider taking the ESBB. While it seems to commit the shareholder to a further five years invested in the VCT, this is not actually the case as it is always open to the shareholder to sell the shares and repay the tax relief.
Overall the results of the Planned Exit VCTs coming out of their five year holding period is that they are not too bad considering the difficult circumstances investors have faced over the past five years.
Martin Churchill is the editor of Tax Efficient Review