Private investors seeking to gain 30 per cent tax relief by backing lower-risk venture capital trusts (VCTs) will have at least another nine months to do so – and should wait for new schemes to be launched, advisers say.
In July, the Treasury launched a consultation on reforming VCTs to ensure that they only provide tax incentives for “genuine high-risk capital investments”. At present, VCTs give upfront income tax relief of 30 per cent on annual investments of up to £200,000 in qualifying smaller companies, with dividends paid tax-free and no capital gains tax on any profits. From April next year, the definition of qualifying companies will be expanded to include those with gross assets of up to £15m, as many as 250 employees and annual fundraising targets of up to £10m. However, the activities of qualifying companies are to be reviewed, following government concerns that some schemes are being used “to channel tax-advantaged finance into companies or projects other than those in the target sector”.
A number of lower-risk activities are already excluded. According to the Treasury’s consultation document, “the original reason for these exclusions was often a concern that the business might be property- backed, meaning that there was less risk in investing.”
Other VCTs that rely on property or asset backing to reduce the risk to capital – and use the 30 per cent tax relief to provide a return – may now come under renewed scrutiny. Asset-backed investments – in pubs, nurseries and sports clubs, for example – are currently made by both generalist VCTs and planned-exit (or limited-life) VCTs, which aim to return proceeds to their investors after the minimum VCT holding period of five years.
VCT managers disagree on the types of asset-backing that may be permitted in future – but seem certain that lower-risk VCTs will continue to be offered, in both planned-exit and generalist forms.
Edge, which invests in the entertainment and media industries, believes some asset-backed VCTs may be “in the firing line”, but says its Performance VCT should be less affected than others. “Property or asset-backed schemes may be problematic,” claims Edge founder David Glick. “Whether they are limited life or not is not the issue. This is not aimed at planned-exit VCTs, but at all asset or property-backed VCTs.” He says the current Edge Performance VCT fund will continue to be at the lower risk end of the scale, even if its peer group becomes riskier.
Downing, which offers a number of asset-backed VCTs, is confident that there will be no significant change to the permitted activities. “We focus on investing in asset-backed businesses and these aren’t mentioned [in the Treasury consultation document],” says partner Tony McGing. “Clearly, the Treasury does not see this as an area where tighter rules are required.”
He argues that the government is only seeking to ensure that tax-incentivised investment goes into “real” businesses, with real employees. “From our point of view, if you take, say, a pub, children’s nursery, or health club, these all employ high numbers of staff, nearly all the funds are used to buy tangible assets, and they all have a number of suppliers and customers.”
As a result, Downing believes its asset-backed schemes will be unaffected by any future rule changes and intends to launch new offerings in the next two months. “It may be that some specific planned-exit VCTs will be caught by the tighter rules because of the types of business they invest in, but so could some generalist VCTs – it is the type of investment, not the type of VCT, that government is interested in re-focusing.”
Only VCTs investing in large-scale solar power installations – to exploit energy “feed-in” tariffs (FITs) – have so far been deemed ineligible for future tax-incentivised investment.
VCT analysts suspect some other activities will be excluded from next year – but see it as no reason to rush into investing now.
“This may be the last tax year in which investors can benefit from the VCT tax advantages in a low-risk environment,” says Patrick Connolly of advice firm AWD Chase de Vere. “However, they should still be a little wary of ‘buy now while stocks last’ offers.”
Some asset-backed VCTs are open for investment now, but Martin Churchill, editor of the Tax Efficient Review, advises investors to wait until later in the tax year, which runs to April 5 2012, when new schemes will be available.
“There will be no changes to VCTs this tax year,” he points out. “Any changes will only be included in the 2012 Finance Act, so investors have the same investment opportunities as last tax year. The options are: invest in the VCTs that are still open from the last tax year; invest in the only VCT of the current tax year, Puma VCT 8 from Shore Capital; or wait until October when there will be more choice.”
Investing now will mean investors’ money starts to work earlier, and tax benefits can be provided by a change to PAYE tax codings. But the choice is very limited. Of the open generalist VCTs, only Downing Absolute Income VCT 1 “C” share is partly asset-backed, and only one planned-exit VCT, from Proven, is available. “In my view, it is always better to wait until there is a wider choice unless the investor knows that the early open VCT is the only one they are interested in,” says Churchill.
Advice firm Bestinvest says: “We believe the market for VCTs only starts from January so, with one or two minor exceptions, investors should wait until there is more choice.”
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