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June 2010 Budget – What does it mean for VCTs?
There were no new changes to VCTs announced in the recent Budget. All that happened is pre-existing legislation from the European Union has been formally introduced including:
- An investee company must have a permanent establishment in the UK but their trade does not have to be wholly or mainly in the UK
- Companies regarded as “enterprises in difficulty” will no longer be allowed to receive VCT (or EIS) funding
- For future funds raised, 70% of a VCT's qualifying investments are to be “eligible shares”. Currently the amount is 30%.
- VCTs will be permitted to list their shares on any Regulated Market in the EU, rather than only the official UK list.
You could view the action of not increasing the benefits of VCTs as the government not doing anything to support small and medium sized enterprises (SMEs) through tax-efficient investment. Indeed, it should be remembered that VCTs remain a key provider of finance in deals ranging from £250,000 to £5,000,000 to SMEs. However, with the cuts announced elsewhere, it is better to be thankful that VCTs were not made less attractive to investors.
With the Coalition continuing with the Labour government policy of restricting higher rate tax relief on pensions and the new 50% tax rate, interest in VCTs is set to increase further. This is due to the following tax benefits which are available on a maximum investment of £200,000 per individual:
- Initial income tax relief of 30% (subject to the investment being held for a minimum of 5 years)
- Tax-free dividends
- Capital gains tax exemption of sale of VCT shares
The income that is paid out from VCTs as tax free dividends is an important feature of these investments, so it is worth looking for a trust which, either has a history of paying out a good level of dividends, or one which intends to have a strong dividend policy. For example, a popular target level of income from a VCT is 5p per share per year in tax-free dividends. A higher rate taxpayer (40%) would have to earn 10.5% gross on other taxable dividends to match this.
What are the charges?
Usually an upfront charge of 5.5%, this is reduced by up to 4% if you choose to invest in a VCT on an execution-only basis via Chelsea Financial Services. The annual running costs of a VCT can be high but are usually capped at 3.6%. Annual costs include Director's fees, fees for taxation advice and registrars, any trail commissions payable to the sponsor and broker as well as the Investment Manager's fee.
As is customary in the venture capital industry the manager will be entitled to receive a performance related incentive based upon returns made to shareholders. These can vary greatly from manager to manager so it is worth reading the criteria for each on carefully before investing.
How do I claim the 30% income tax relief?
This is very straightforward. When you complete your tax return, there is a VCT section whereby you will then be repaid the income tax by the HMRC via your tax code, as a lump sum rebate or if self-employed, a reduction in Schedule D tax.
A Word Of Warning
The value of of your VCT investment can fall as well as rise, and you may not get back the full amount invested. Furthermore, it would be unwise to purchase a VCT purely for the upfront tax relief, and try to sell immediately after the minimum five year holding period. VCTs are long-term investments. It usually takes three years to invest the monies raised and build a portfolio in qualifying investments, which are usually unquoted companies that don't lend themselves to short term horizons. VCTs should be considered as at least 7-10 year investments. In addition, liquidity of these investments is poor, with the secondary market for shares of VCT companies notoriously illiquid.
Please note, that if you download a prospectus from our website and it does not have our stamp on it then please send it to our offices. If an application is sent directly to the registrars and it does not carry our stamp, then you won't benefit from our discounted terms. Furthermore, if you have previously bought a VCT directly from the provider, and wish to top up your investment, send the application form to CFS and we will ensure you receive a discount.
Chelsea Financial Services offers discounts on execution-only VCT purchases, usually in the form of extra shares.
