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Venture Capital Trusts In 2007/2008
Budget Changes
In March 2007, some changes were announced affecting current and future VCTs. For existing funds, the changes were broadly positive, allowing managers more flexibility in realising gains from investments and making changes within the portfolios without breaching the rules.
For funds raised subsequent to 6th April 2007, qualifying investee companies are restricted to a maximum of 50 full time employees and a £2m annual fund raising limit. These changes mean it is unlikely we will see any new AIM VCTs coming to the market with managers unlikely to find sufficient investment opportunities within those parameters, although monies raised in previous tax years are unaffected. However, after preliminary discussions with some leading Generalist and Specialist managers, we expect to see some new issues/ top-ups from established managers, although qualifying opportunities are likely to be at an earlier stage of the business cycle and hence present a greater risk.
Due to the changes, we also expect there to be further consolidation within the industry with changes in manager (a recent example being the First State AIM VCT being taken over by Noble and becoming the Noble AIM VCT) and mergers of VCTs run by the same manager to create more cost effective vehicles.
It is worth remembering these recent changes are in addition to the ones brought in via the Finance Act 2006, most notably the gross assets measurement for VCT qualifying transactions from £16m to £8m in a bid to direct funds towards early stage businesses. Despite recent changes, the VCT industry is in good health with over £2.7bn of VCT money currently being managed by 42 managers across over 100 VCTs (Source: www.theaic.co.uk) and with the 30% income tax relief and the possibility of tax free dividends and growth, VCTs still represent an attractive investment opportunity for high-net worth investors.
Here is a brief summary of the benefits available upon investing in a VCT for the 2007/08 tax year:
- Income Tax rebate of 30% (Provided the investment is held for a minimum of 5 years)
- Exemption from tax on dividends
- Exemption from Capital Gains Tax on profits made from selling of VCT shares
The 30% income tax rebate is available not just to higher rate taxpayers but also to basic rate taxpayers, so long as you have paid as much tax as you are claiming a rebate for. Please note the tax relief should be viewed as a bonus to purchasing the underlying investment, and not the prime reason for investing in a VCT. Investors should make themselves aware of the potential downsides associated with VCTs, including investment and liquidity risks, before making a purchase.
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.
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