UK Budget reduces VCT tax breaks

The UK Chancellor’s decision to reduce the tax relief on Venture Capital Trusts (VCTs) by 10% from 40% to 30% from April may prompt a last minute rush to invest in VCTs and benefit from the current tax relief. The change in the VCT tax rules doesn’t come as a surprise for VCT managers as the Government has long stated the 40% relief was temporary.

Changes affecting VCTs announced in the budget include income tax relief decreasing to 30% from 40% for the 2006/07 tax year and subsequent years; the minimum investment period will increase to 5 years from 3 years and the changes to the gross assets limit (£15m down to £7m) may make VCTs this year more attractive as next years’ VCTs will not be allowed to compete for larger deals. This change will reduce the number of qualifying companies in which VCTs can invest and it is thought AIM funds will be the hardest hit by these changes.

Chris Ring, director of Shore Capital’s Puma VCTs, advises: “If you’re going to invest in a VCT do it now; they’re going to be significantly less attractive next year because of the changes in the Budget.”

Robert Drummond, former British Venture Capital Association chairman and current Chairman of Chrysalis VCT, adds: “With the 30% income tax relief rate the Chancellor has found a compromise between maintaining the current level (40%) and returning to 20%, but this change, together with the increase in the minimum holding period from three to five years appreciably alters the risk-reward profile of private equity investment by personal taxpayers and will encourage people to get as much as they can invested by 5 April.”

But while 30% income tax relief is better than the 20% originally threatened, many VCTs have been struggling to raise their investment levels this year in spite of the current, more favourable regime. According to the Allenbridge Tax Shelter Report, eight VCTs have yet to raise even 10% of their target, with only weeks to go before the end of the tax year.

However, Patrick Reeve, managing director of Close Venture Management, which currently manages a portfolio of six Venture Capital Trusts (VCTs), which have raised a total of £260m to date, says it’s not all bad news: “It could have been a lot worse. It will probably cut the market down from £500m to £200m, which is the amount raised in the late 1990s. It’s getting the industry back to where it was, which isn’t such a bad thing.”