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Picking apart Hammond’s changes to VCTs

Well there’s no need for VCT investors to be patient any longer.

The Government’s Patient Capital Review response, which reviewed VCTs and EIS schemes and looked at the obstacles to getting long-term investment into firms, was published in the Autumn Budget.

A collective sigh of relief could be heard when it became clear that the pre-Budget rumours of changes to the tax reliefs were just speculation and all the tax reliefs were to remain in place for investors.

However, another set of important rule changes will be introduced, close on the heels of the last rule changes in 2015. We know the direction of these changes and will shortly have more detail when further legislation and guidance is published. Let’s take a closer look at what’s being proposed for VCTs.

First, there is a new principles-based test for qualifying investments, designed to boost investment in companies where there is long-term growth and development and significant risk. This will be introduced before the end of the tax year when the legislation receives Royal Assent.

Whether the test is met will depend on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors. The condition will have two parts: whether the company has objectives to grow and develop over the long-term and whether there is a significant risk that there could be a loss of capital to the investor greater than the net return.

Phil Young: A word of warning on VCTs and EISs

The headline-grabbing change was a boost to the annual investment limit for knowledge-intensive firms which will be doubled from £5m to £10m for investments made by VCTs. This is clearly designed to boost investment in innovative and higher-risk companies.

Knowledge-intensive companies, in case you are wondering, have to invest significantly in R&D and either create intellectual property or have a high percentage of the workforce with higher education degrees. VCTs can invest in knowledge-intensive companies up to 10-years old rather then the usual seven years for other companies. From 6 April, there will also be greater flexibility over how the age limit of 10 years is applied.

There was another significant rule change which will increase VCTs’ exposure to investee companies (qualifying investments). For accounting periods beginning on or after 6 April 2019, the percentage of funds VCTs must hold in investee companies will increase to 80 per cent from 70 per cent. In addition, from 6 April 2018, VCTs will be required to invest at least 30 per cent of new money raised in investee companies within 12 months, after the end of the accounting period in which the funds are raised.

These changes are clearly designed to ensure VCTs invest in the ambitious, ‘innovative companies that are the backbone of the economy’. VCTs will have more exposure to these companies, which start small but can grow into household names in the future, helping to create jobs and growth.

The important news is that the generous tax benefits remain to compensate investors for the risks they take. It’s interesting to know that the majority of VCT investors tend to invest smaller amounts into VCT funds. In the 2014-15 tax year, 44 per cent of investors made a claim for an investment of £10,000 or less.

Of course, we will continue to consult with the Government and industry to ensure these changes reflect commercial reality. However, it’s reassuring for investors to know that the VCT industry has the benefit of highly experienced managers which have adapted to changes in the past and continued to deliver good returns for shareholders. This was also good news for the UK’s smaller companies, the backbone of the economy, as VCTs will be able to continue to provide them with vital scale-up capital to grow.

Annabel Brodie-Smith is communications director of the Association of Investment Companies



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