Private investors are expected to increase their use of tax-efficient venture capital trusts (VCTs) this tax year, in spite of a government move to restrict the renewable energy tariffs available to projects backed by some of these schemes.
Last year was a “vintage year” for VCTs, according to the Association of Investment Companies, with new inflows into the sector totalling £340m – making it the fifth most successful fund-raising season since the schemes were created in 1995. In the current tax year, however, total investment is forecast to rise to £450m, based on projections by Tax Efficient Review, the VCT industry publication.
VCT manager Octopus believes the availability of 30 per cent tax relief on contributions has made the schemes an attractive alternative to pensions for high earners. “With continuous changes to pension legislation and the highest rate of income tax now 50 per cent, the trend for using VCTs is gathering pace,” it says.
Beringea, which manages the ProVen VCT and ProVen Growth & Income VCT, estimates that £105m has already been committed this tax year, with a rush of investments expected before the year-end in April.
But this week, energy secretary Chris Huhne announced a review of the Feed-in Tariffs (FITs) scheme for small-scale low-carbon electricity generation, which was to be used by a number of specialist VCTs backing solar power installations – including new schemes being marketed by fund managers Matrix, Ingenious and Foresight.
As result, Tax Efficient Review has warned private investors that some VCT managers will have to change their strategies or withdraw their schemes altogether.
“I see a clear message from the government: the FITs regime is to be targeted away from large installations backed by financial groups including VCTs,” says Martin Churchill, editor of Tax Efficient Review. “VCT providers can respond only in four ways: continue to market a product aimed at low-end rooftop and residential solar; withdraw their products; install projects prior to July; or move the investment emphasis towards other renewable energy categories. Overall, the effects of this announcement must surely be to increase the risk attached to solar VCTs, and reduce potential returns.”
Foresight’s Solar VCT was to have invested in three types of solar energy: residential rooftop, industrial rooftop and ground mounted – but the manager believes it can do enough deals in un-affected residential projects to give investors its target return of £1.30 per £1 share after five years. “The portfolio base may be different, but the message to investors is ‘nothing’s changed’,” says Mike Curry, Foresight director.
Ingenious, which is looking to raise £30m for its Solar VCTs 1&2, is also planning to stay in the market. Many of the projects that it is backing will be able to install their solar panels before any review decisions come into force. “Our understanding is that if there are any resulting changes, these will not affect projects previously accredited for the current FIT,” explains Sebastian Speight, director.
But Matrix, which last month announced the launch of two Clean Energy VCTs investing “predominantly in industrial rooftop solar energy projects, suspended its offer on Friday. In a letter to investors, it says: “The initial view of Matrix and the Boards of the VCTs is that the future of the FIT scheme is now uncertain, which is a material risk to investors.”
As a result, financial advisers are warning investors to exercise caution when choosing a VCT.
“The risk is not low,” says Adrian Lowcock of Bestinvest, the advisory firm. “To be certain of obtaining current FITs rates, they must be operational by July 19. But we see relatively few solar projects currently under development being grid-connected by then.” He has already removed Matrix Clean Energy and Hazel Renewable Energy from his list of recommended funds.
AWD Chase de Vere is awaiting clarification on the government review. “We are not recommending any solar VCTs to our clients until we have this clarification,” says spokesman Patrick Connolly.
Tax Efficient Review is now revisiting its ratings for renewable energy VCTs – but expects investors will simply shift to similar plans. “Our clean/green energy VCT reviews are in abeyance, but I still see the market as around £450m this tax year as money not going into clean/green will go into other planned-exit VCTs.”
These “planned-exit” schemes now account for half of all investment in VCTs as they offer all the tax advantages but with the prospect of a return after five years.
Investments into VCTs earn 30 per cent upfront tax relief on contributions of up to £200,000, if held for five years, with no tax on capital gains or dividend income.
But unlike “generalist” VCTs, which back higher-risk start-up companies, planned-exit VCTs back lower-risk, lower-growth businesses with the aim of keeping capital intact – and generating most of their gains from the tax relief.
Among the new planned-exit schemes open for investment this year are the Ingenious Entertainment and Edge performance VCTs, which back live events with revenues underpinned by licensing deals; the Proven Planned Exit VCT with a focus on health and education; and the Downing asset-backed plan.
Bestinvest is currently “positive” on Edge Performance and Edge Encore, as well as the generalist Matrix VCTs fundraising offer. Chase de Vere prefers traditional generalist VCTs that invest in a diversified portfolio of small companies such as Northern Venture Trust, ProVen Growth & Income and Baronsmead 5.