Although the full impact of HMRC’s recent VCT rule changes will not become clear until Royal Assent is obtained (expected early November) at this stage it looks likely that VCTs may have to alter (to a greater or lesser degree depending on their investment strategy) how they source and select investments. The most affected would seem to be those VCTs that concentrate on management buy-outs (MBOs). As a result, we are likely to see fewer VCTs coming out with offers this tax year and many VCTs waiting until after Royal Ascent to make a decision, which means their offers may not open until early 2016.
Since 2015/16 looks set to be a shorter VCT season with fewer participants, it would seem highly unlikely that funds raised will reach anywhere close to the £429m raised last year (which was the largest amount raised since 2005/06)*. This is a dilemma for advisers as supply is reducing just at a time when other HMRC rule changes, such as the lifetime cap on pension contributions, has strongly increased client demand for tax-efficient investment products.
So until we get clarity on the new VCT rules, what can advisers do in the meantime?
A potential alternative are Enterprise Investment Schemes (EIS). EIS were created by the UK government on a very similar premise to VCTs – to provide funding to UK SME businesses – and, as such, EIS have many of the benefits of VCTs, including: 30% upfront income tax relief (three year minimum holding period for EIS vs. five years for VCTs) and no capital gains upon realisation.
EIS also have some added benefits not available to VCTs, including: 100% IHT relief for EIS investments after only two years (through Business Property Relief) and the ability to carry back the 30% income tax relief to the previous tax year from which the investment is made.
However, there are differences – most notably the fact that rules surrounding the type and size of companies that qualify for EIS mean that they tend to focus on smaller, riskier companies compared to VCTs. Further differences include the fact that VCTs are listed on the London Stock Exchange whereas EIS are not, meaning a much less liquid and obvious secondary market for EIS. As such, advisers will need to make sure that their clients are suitable for the level of risk associated with EIS investments.
What might surprise advisers is that assets into EIS last tax year more than doubled those into VCTs (over £1bn raised**). In such an established market, there is ample choice for advisers looking for a diverse number of EIS propositions, whether by manager or investment strategy. Therefore, for the right client, they can provide advisers with a viable alternative to VCTs during the current rule uncertainty and beyond…
* Source: The AIC – http://www.theaic.co.uk/
**Source: National Statistics – HM Revenue & Customs – EIS and SEIS Commentary Note – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/448308/July_2015_Commentary_EIS_SEIS_Official_Statistics.pdf
This communication has been issued by LGBR Capital LLP, Candlewick House, 120 Cannon Street, EC4N 6AS. LGBR Capital LLP is an appointed representative of Mirabella Advisers LLP, which is authorised and regulated by the Financial Conduct Authority. The document is intended to be communicated solely to persons that fall within the FCA Classification of ‘Professional Client’.
This document does not constitute a recommendation, or an offer to buy or sell any security or fund, and is not intended to substitute the offering documents or prospectus of any fund. Venture Capital Trusts (“VCT”), Enterprise Investment Schemes (“EIS”) and IHT mitigation service are relatively complex products with significant performance and liquidity risks. Your capital is at risk if you invest in a VCT, EIS or IHT mitigation service and you may lose some or all of your money invested. Any decision to invest in a VCT, EIS or IHT mitigation service should be made solely by reference to, and strictly in accordance with, the information, terms and conditions contained in the Prospectus and Application Form. Before deciding to invest, investors should carefully consider the product’s investment objectives, risks and expenses and other information as set out in the Prospectus and Application Form.
The statements and opinions set out in this document are made as of the date of publication, and may not be applicable thereafter. Opinions are based on our analysis of data that we believe to be objective and reliable; however we accept no liability in respect of its completeness or accuracy.
Rates of tax, tax benefits and allowances are based on current legislation and HMRC practice and depend on personal circumstance. These may change and are not guaranteed. Past performance is not a guide to future performance; the value of an investment and income from it can go down as well as up. Prospective investors are advised to consult their own professional advisers before contemplating any investment. No representation or warranty expressed or implied is made or given by any person as to the accuracy or completeness of the information contained in this email and no responsibility or liability is accepted for any such information. This material may not be distributed, published or reproduced in whole or in part.