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Martin Churchill: Generalist VCTs back in fashion

With the tax year behind us, I thought this would be a good time to see how VCTs fared.

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The overall message is that both the VCT and EIS markets had a good year, raising funds about level with the tax year 2011/12. This is in my view a very good result with the triple uncertainties that both product categories faced – the RDR, the FSA Consultation Paper 12-19 and the new Disqualifying Purpose Test.

The VCT market raised around £270m of new money in tax year 2012/13. Various press articles have been published under headlines such as “In the 2012/2013 tax year the VCT sector raised a total of £402.5m, representing a 22 per cent increase on the £331m raised in the previous year” or “VCT fundraising on the up – Sector raised £403m last year”.

The difference is that an Association of Investment Companies press release on which the articles were based made clear that the £403m figure includes enhanced buybacks and says “Excluding enhanced share buy backs, the VCT sector raised £269.2m in the 2012/13 tax year compared to £267.4m raised in the previous tax year”.

Enhanced buyback offers allow investors who are interested in committing to being invested for a further five years to effectively swap out their current holding for new shares on which they can claim the up front 30 per cent income tax relief. The key point is that this is not an exit opportunity for investors as all the proceeds must be reinvested in new shares. This is not new money but has been very popular and as the AIC numbers show around £132m was involved.

The Budget contained the following: “.. following a number of representations from investors, the Government is concerned that VCTs offering enhanced buy-backs are not operating within the spirit of the legislation. The Government will continue to monitor particular aspects of the venture capital schemes to ensure that they remain well-focused and supportive of businesses needs”.

The VCT funds raised were split roughly 66 per cent by generalist VCTs, 5 per cent from AIM based VCTs and 27 per cent from planned exit VCTs. 

This is a major shift towards generalist VCTs compared to tax year 2011/12 when they had a 50 per cent share of the market.

This change in my view is driven by a number of factors: good generalist performance, a recognition that planned exit VCT “dividends” in the early years are really mostly a return of capital, a narrowing of buyback discounts for generalists, a worry about the Disqualifying Purpose Test and its application to planned exit offers and disappointment with some of the results of the first crop of VCTs that reached the end of their five year minimum holding period.

My next piece will focus on EIS.

Martin Churchill is editor of Tax Efficient Review

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