By GRAHAM FROST 22/03/2006
Today's budget saw Chancellor Gordon Brown significantly reduce the attractiveness of VCT investments from 6 April 2006:
- The income tax rebate given on new VCT investment will fall from 40% to 30%.
- The minimum period for which VCT investors must hold their shares will rise from three to five years.
- VCTs which raise funds after April 5th must invest in companies with gross assets of less than £7m before investment and £8m after (currently £15m and £16m respectively).
The annual personal VCT allowance will remain at £200,000 and all VCT investment will continue to enjoy tax-free growth and dividends.
| "The combination of these changes will dampen the appeal of VCTs from 6 April..." |
While any one of these changes might have been palatable in isolation, the combination of all three will severely dampen the appeal of VCTs from 6 April. Forcing VCTs to invest in much smaller companies than at present will turn many investors off due to higher risk, while the increased holding period and lower tax rebate will significantly reduce the tax incentive. 30% rebate for a five year holding period is much less appealing than 40% over three years.
Given VCT income tax rebates over this and the last tax year will likely cost the Treasury over £420m, it's no surprise Gordon Brown has stepped on the brakes. However the extent of the changes is surprising and we believe anticipated VCT sales of £700m this year will plummet to around £100-150m next. This has wider implications, as we could see significant net outflows once investors who purchased VCTs in the 2004/05 tax year have held their investment beyond three years. If just 1/5th of these investors sell their VCT in 2008, it could wipe out any new monies raised. There is now a real risk that the VCT market, and hence monies invested in small, unquoted, companies, will consistently shrink. Once again the Treasury has turned away from offering IHT relief on VCT shares.
With just nine working days until the end of the tax year we expect today's announcement to cause a last minute stampede, as investors seek to secure a 40% income tax rebate before the changes. If you wish to harness this year's VCT allowance you cannot afford to hang around, but equally don't make a panicked decision and invest solely for the income tax rebate. You should also remember that, unlike ISAs, VCT investment cannot be left until the twelfth hour. A VCT will close as soon as it is fully subscribed and, in any case, VCT promoters usually close the doors a couple of days before the tax year end so that they have time to allot shares by 5 April.
Other key budget announcements include:
EIS
The annual limit for income tax relief doubled top £400,000. As per VCTs, the 'Qualifying' companies in which an EIS may invest must have gross assets of less than £7m before investment and less than £8m afterwards. Unlike VCTs, this applies to shares subscribed from 22 March 2006.
| "Property companies wishing to become a UK REIT will pay an entry charge of just 2%..." |
REITs
These tax efficient property vehicles will definitely go ahead with effect from 1st January 2007. Property companies wishing to become a UK REIT will pay an entry charge of just 2% of the market value of their investment properties, much lower than expected , especially for companies with large unrealised gains. The share prices of most property companies have risen sharply this afternoon in reaction. However, the AITC still feels that the proposed rules are too complex and could lead to the legislation being unused, just as with Housing Investment Trusts.
IHT & Pensions
If you choose to 'Alternatively Secure' your pension then any monies remaining when you die may be passed free of IHT to a spouse/civil partner/financial dependent. The monies will otherwise be subject to IHT as though they formed part of your estate, but it appears the pension will now be able to pay the IHT liability, whereas there had been concerns that the estate would have to do so.
Finally the Chancellor has announced there’ll be no increase in duty on Champagne, so as not to penalise World Cup celebrations this summer. Being a Scotsman (and tight with the Exchequer purse strings) perhaps he’s banking on England not winning the World Cup!