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.

Summer Budget 2015 – VCT & EIS update

No Budget is complete without some tinkering with the rules around tax-advantaged venture capital schemes buried in the notes, and this week’s Budget was no different.

Jason Hollands Jason Hollands
09 July 2015

In March 2015, the Budget contained proposals to tighten the rules around eligible investments for VCTs and EISs, primarily to ensure they complied with European State Aid rules. At the time HMRC set out a proposal to introduce a restriction on the age of a business that had not previously existed (to 12 years and 10 for ‘knowledge intensive companies’) and a new lifetime allowance for the overall level of tax-advantaged funding that could be received of £15 million.

This week’s Budget saw the proposed company ‘age limit’ scaled back further, with investment now to be directed to companies within 7 years of their first commercial sale (10 in the case of ‘knowledge intensive’ companies), clearly directing VCTs towards earlier-phase businesses. Current VCTs have backed companies that were first set up decades ago, but have helped them, often under new management, to grow significantly.

Additionally, the ‘lifetime’ limit for tax-advantaged funding has been pushed back from a proposed £15 million in March to £12 million as of this week’s announcement (£20 million for ‘knowledge intensive’ companies), an adjustment that might partially reflect exchange rate changes, since these rules are being driven by Europe.

In a subsidiary paper issued on Budget day, HM Treasury has indicated that existing VCTs potentially may no longer be able to reinvest monies raised from exits in businesses that were previously eligible at the time of funding (such as a Management Buy-Out) into similar transactions. Therefore ‘grandfathering’ of previous deal types looks set to end and consequently proceeds for exits will either need to be reinvested in companies meeting the new restrictions, or returned to shareholders as special dividends. Additionally, there is a new proposal introducing greater restrictions on how monies are invested within a VCT's non-qualifying portfolio, again potentially restricting support for MBOs.

What does this mean for VCT and EIS investors?

While the devil is in the detail and we will know more when the Finance Bill is published next week, we expect that the refocusing of VCTs onto younger companies is likely to mean that VCTs will seek to raise more modest sums than in recent years, to reflect the narrower set of opportunities that will be available.  This comes at a time when reductions in pension tax reliefs for higher earners and cuts in the pension lifetime allowance, arguably might create more demand for VCTs and EIS as other forms of tax efficient investments. We will of course review the details of any new VCT offers as and when they emerge but currently do not anticipate any until after the summer.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

VCTs and EIS should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. 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.