The Summer Budget announced changes to the qualifying investments for Venture Capital Trusts (VCTs) and EIS investments. Some of changes and their impact were not immediately apparent but have come to light since.
The rules will effectively be tightened to keep them focussed on early stage companies. For example for VCTs the investee companies will need to have been trading less than 10 years (or 7 years if they are not “knowledge intensive” businesses) and management buy-outs will be discouraged. The details of the new rules are given in a document entitled “Summer Budget 2015: Amendments to tax-advantaged venture capital schemes” and in the Government’s response to a public consultation on “Tax-advantaged venture capital schemes” which has just been published. Anyone with an interest in this area can find them on the internet. ShareSoc did respond to the original consultation and you can see our response on the “Consultations” page of our web site.
Some VCT managers have declared that the new rules will make it more difficult to find suitable investments. The Northern VCTs have immediately suspended operation of their Dividend Investment Scheme (“DRIS”) so they will cease issuing more shares and instead will be returning cash to investors. Surely a sign that they feel that the new rules are very prejudicial.
One particular disadvantage for private investors is a new rule that will effectively prevent them from taking up EIS shares in Open Offers if they have previously bought shares in the company. So for example, if you bought shares in an AIM company in the market and there is then an EIS qualifying Open Offer then you won’t be able to participate. ShareSoc is writing to the Treasury about this as it seems particularly prejudicial to private investors and it is not clear why such a rule is necessary.
We will continue to monitor developments in this area as it is of particular concern to private investors. The changes to dividend taxation in the Budget might favour investment in VCTs as their dividends are tax free. So for example Maven Income & Growth VCT on which we have recently published an AGM Report (available to Full Members here) paid a dividend equivalent to a yield of 9.3% last year which is even higher when grossed up at your marginal tax rate. But the new rules might make getting a good return from VCTs more difficult – and historically many of them were poor investments even after taking the tax reliefs into account.
Rensburg AIM VCT
This VCT has announced that they have agreed for Unicorn AIM VCT (UAV) to take over the assets of the company after a tender offer of approximately £5 million (about a third of the net assets) to existing shareholders. Shareholders who do not take up the tender offer will receive shares in Unicorn AIM VCT. The tender offer would enable those shareholders who wish to receive cash to exit, while those who wish to retain the tax benefits of holding VCT shares can accept the shares.
The new shares in UAV to be issued will be based on the relative net asset value of the two companies which is normal practice. UAV will be paying the costs of implementing the proposals, other than the tender offer costs and any termination payments due to fund manager Investec – which are not given and this may be a question to raise at the AGM this week as they could be substantial.
The directors of Rensburg AIM VCT seemed keen to obtain a merger with another AIM VCT after they did a U-turn on doing a wind-up. That may be an unwise decision now that the new VCT rules have been published because surely AIM VCTs, which focus on listed and hence larger companies, might find it particularly difficult in future – as Rensburg were already seeing in finding good new investments at reasonable prices. I will do a report on the AGM of this company later this week (on the 22nd).
Roger Lawson
” But the new rules might make getting a good return from VCTs more difficult – and historically many of them were poor investments even after taking the tax reliefs into account.”
Isnt this a bit of a sweeping statement- surely many vcts have done well too- id be interested in more clarification on thse points
regards
ali
Ali: some have done well, but some have not done well based on total return over many years (typically they have been renamed, recapitalised. merged with others or wound up). You have to look back at VCTs from when they were first introduced to see the real picture. Only some managers have learned how to make a success of them. Unfortunately the financial world is great at remembering its successes, while forgetting the disasters.
Roger Lawson
[…] Mr Lewis was then invited to explain the proposed changes to VCT regulations which will affect what they can invest in. See this ShareSoc blog post for a brief summary: https://www.sharesoc.org/blog/company-news/vcteis-changes-and-rensburg-aim-vct/ […]