Venture Capital Trusts (VCTs) look set to benefit from Chancellor Gordon Brown’s Pre-Budget Report. The Government plans to increase support for the VCT sector with proposals to remove, from 6 April 2004, the current capital gains tax deferral relief for investments in Venture Capital Trusts (VCTs). But it seems a lack of clarity with these proposals will lead to a stagnation in fund raising for the current tax year.
Brown has proposed raising the annual limit for Venture Capital Trusts and Enterprise Investment Schemes to £200,000 and increasing, for two years, income tax relief for VCT investments to 40 per cent. He also proposed extending tax relief for the cost of managing investments from investment companies to trading companies.
Ahead of the pre-budget report the BVCA made some specific suggestions to the treasury to provide fiscal incentives and further tax reforms to help re-energise VCT fundraising. John Mackie said: “The BVCA has pressed for reform for VCTs over the last two years and particularly welcomes the Chancellor’s announcement on Venture Capital Trusts – which include extending the annual limit to £200,000 and raising the income tax relief from 20% – 40% for two years.”
The problem for VCTs has become acute and the BVCA has been actively lobbying to revive the sector. Over the last three years funds raised by VCTs have collapsed from £450m to just £50m, as capital gains have diminished. There is little optimism for the foreseeable future with fund raising predicted to remain at around the £50 million level. And there is general agreement among players that the industry is unsustainable at this level.
David Cartwright, partner tax and legal service at PricewaterhouseCoopers, says: “The BVCA has been campaigning for some time to change the regulations for VCTs to make it more attractive to invest. Investors are now in a dilemma. They are uncertain about investing because the proposals set out by the government are not clear. On the other hand we are just coming out of a recession and so now is a good time to invest.”
Simon Rose, tax partner at SJ Berwin says the proposals are at least a step in the right direction: “The proposals are a good sign. It shows the Revenue is willing to work with the industry. But it’s not quite given us what we’ve asked for. The question is whether it is the best thing they could have done and whether the message is clear enough to make a difference.” Another question he poses is whether the market will react to the proposals. “The government has to show it is serious enough to follow this through. Whether VCT managers will launch more VCTs on the strength of what at the moment is just a promise remains to be seen. Investors will be nervy – people don’t invest large amounts of money based on pure promises.”
The budget is expected in March. Timing-wise this makes it difficult for VCTs who are normally out marketing for a fund before the end of the tax year in January/February. From a practical point of view managers may decide to hold back and launch a fund the following year when the changes should be in force. And so the VCT market may not see the benefits of the proposals until next year.
The revenue has also proposed to increase the limit you can invest in a VCT from £100,000 to £200,000. This will be beneficial to a certain extent because statistics have shown that certain investors might commit £100,000 on the last day of the current tax year and £100,000 on the first day of the next. However, while it is a good proposal and will attract more money for VCTs, it won’t make a huge impact as statistics also show that the average investment in VCTs is significantly lower than £100,000 standing between £17,000 and £19,000.
How the VCT industry will evolve remains to be seen. Since 1995 around £1.625bn has been raised by over 70 VCTs. Five major players dominate the VCT space managing around 50% of the total amount raised. They are Aberdeen Murray Johnstone Private Equity, Close Brothers, Quester, Isis Equity Partners (Baronsmead) and Northern Venture Managers. And so, with many of the smaller VCTs in the doldrums, a consolidation of the industry is on the cards, but this too will take time. The industry has been negotiating with the inland revenue for the last three years to allow VCTs to merge with one another. At the moment there is no such legislation and if VCTs did merge they would lose their tax relief. As always, it’s a waiting game.
Table: Amount invested in VCTs (£m) 1995-2003
Source: Inland Revenue; PricewaterhouseCoopers and Allenbridge (VCT)