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Martin Churchill: Tax-efficient notes

Now the 2011/12 tax year is behind us, it is an opportune time to look back as well as forward and examine venture capital trust and enterprise investment scheme fundraising.

Figures published by the Association of Investment Companies show £330m of new shares were issued by the VCT sector during the 2011/12 tax year compared with £365m in the previous year.

The £330m figure includes about £45m of funds raised early in the tax year from offers that were kept open from 2010/11 and around £60m of enhanced buyback money.

We took a look last month at enhanced buyback offers. These 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.

We noted that this is not an exit opportunity for investors as all the proceeds must be reinvested in new shares. Also, it does not increase in any way the funds under management in the VCT industry.

The amount raised in the traditional season running from October 2011 to April 2012 was probably close to £225m, which is down by about 27 per cent over the figure for October 2010 to April 2011, which I estimate to have been about £310m.

The split between generalist and planned exit offers remained constant at around 50-50 in both years.

Last year was a reasonable one for VCTs but there is no question that the amount raised was reduced, mainly through the increased interest in EISs.

Figures for EIS fundraising are difficult to obtain and HM Revenue & Customs statistics are not usually up to date. The latest figure is £610m for 2009/10 but, in my view, more than £500m was raised by retail EIS offers alone in 2011/12, well up on the previous year and I expect this high level of interest to continue. I define retail offers as those sold through the IFA channel.

For planned exit VCTs and capital preservation EISs, the big unknown looking ahead is the application of the disqualifying purpose test, announced on December 6, 2011.

This will apply to shares in underlying investee companies issued on or after April 6 and will disqualify shares that are issued subject to arrangements whose main purpose is to generate access to the reliefs in circumstances where either the benefit of the investment is passed to another party to the arrangements, that is, the investor, or the business activities would otherwise be carried on by another party.

Martin Churchill is the editor of Tax Efficient Review

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