Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

The Autumn Budget leaves VCT tax reliefs untouched

Unless you are a first time property buyer or a very wealthy business angel with over £1 million a year to invest in Enterprise Investment Schemes (EIS), the Autumn Budget was fairly uneventful. This isn’t necessarily a bad thing, with nothing said of further raids on pension allowances of reliefs and the ISA allowance left at £20,000.

Jason Hollands Jason Hollands
30 November 2017

VCT and EIS tax incentives aren’t going anywhere

Further good news is that the Budget also left the generous tax incentives available on Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) untouched, much to the relief of the growing number of investors who use VCTs to supplement ISAs and pensions as part their long-term, tax-efficient investment portfolios.

VCTs and EIS are government-approved schemes to encourage investment into fledgling, unquoted or AIM-listed UK companies that provide investors with tax incentives because of the inherently higher risks involved with such enterprises. UK individual investors subscribing to new VCT share issues will therefore continue to receive a 30% Income Tax credit on their investments providing they hold the shares for at least five years and any dividends and gains will also be tax-free (the maximum that can be invested in VCTs this tax year is £200,000).

A focus on small, innovative companies

Alongside the Budget, the Chancellor announced a wide-ranging package of measures designed to unlock £20 billion of financing for small, innovative companies over the next decade. As one small part of this, measures were announced to ensure that VCTs and other government-approved tax-advantaged venture capital schemes are focused squarely on providing growth capital to younger, innovative companies, and that these schemes are not used for tax-motivated investments that appear to be structured to primarily preserve capital and reduce risk.

Qualifying investments made by VCTs will need to meet a new principle-based test. HMRC will consider whether companies that VCTs propose investing in have objectives to grow and develop over the long-term, and also whether there could be a potential risk of loss of capital greater than the return after tax relief. In other words, the Government wants to stop investments that are primarily tax-motivated. This a sound principle and one that will not impact the vast majority of VCTs, but which may result in fewer new asset -backed investments made by VCTs in the future as these will receive greater scrutiny. This will not affect investments already owned by VCTs within their existing portfolios.

A boost for knowledge-intensive companies

For companies with high growth potential, a further boost was announced. Businesses which meet certain criteria and classified as knowledge-intensive companies (those in areas with high research and development spend, like bioscience and high-tech companies) will be able to accept twice as much funding in a year from VCTs and EIS than they are able to currently.

A further technical tweak is that it is proposed that from 6 April 2019, VCTs should be at least 80% invested in qualifying investments, which is an increase from the current requirement to be at least 70% invested in them. We therefore expect this to mean that some VCTs will decide to raise less new funds from investors in the 2018/19 tax year as they make this adjustment and focus on investing the cash they raise in this tax year.

While a few VCT share offers have already closed this tax year, including those from the popular Northern VCTs and the Unicorn AIM VCT, there is still capacity in several offers, but we expect some of the more popular offers to close well ahead of the tax-year end. Those we believe merit consideration include the Mobeus VCTs, Maven Income & Growth VCT 3 and 4, and the Albion VCTs. To find out more visit our VCT new offers page or call us on 020 7189 2400.

Important information

VCTs should be regarded as higher risk investments. VCTs are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Historical or current yields should not be considered a reliable indicator of future returns, which cannot be guaranteed. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change, and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

We aim to provide investors with information to help them make their own investment decisions although this should not be construed as advice or an investment recommendation. If you are unsure about the suitability of an investment or if you need advice on your specific requirements, we strongly suggest that you consider professional financial advice.