This year’s venture capital trust (VCT) fundraise season has kicked off with a bang. Many of the sector’s big beasts opened earlier than usual, including British Smaller Companies, Northern and Albion, with other players such as Pembroke and Puma VCT 13 recently launching too.
Why the rush? Much of it stems from the prospect of investors bringing their financial planning decisions forward, ahead of Chancellor Rachel Reeves’ Budget. This was the case last year, and many VCTs have decided to pre-empt the same possibility this year by opening early. To be clear, there is no indication that VCT tax reliefs are under threat, having received full backing in last year’s budget, but investors are understandably keen to act early amid uncertainty elsewhere in the tax landscape.
Growth-focused reforms
However, wider considerations potentially affected by the budget, such as pensions, may encourage more people to look at VCTs. Their tax-efficiency is appealing: VCT investors receive income tax relief of 30p for every £1 invested, subject to an annual £200,000 investment allowance, as well as tax-free dividends and capital gains.
It’s obviously important to note the investment universe for VCTs is more constrained and higher risk versus pensions; however, unlike VCTs, there is a perception that pensions are overly susceptible to goalpost tampering from a tax-hungry treasury, especially in the wake of last year’s “lump-sum frenzy” and inheritance-tax hit.
In comparison, VCTs are still perceived as fairly immune from this sort of unhelpful rule tinkering. If anything, there is a glimmer of hope that VCT rules may change for the better. A new campaign, Growth Beyond Limits, backed by the Venture Capital Trust Association (VCTA), is calling for long-overdue updates to the rules, and has received significant support from across the UK’s venture capital industry.
The main proposals include uprating the lifetime and annual investment limits for VCTs that have been frozen for nearly a decade, eroding their real value through inflation. More than 100 leading entrepreneurs, investors and policymakers have signed an open letter urging the Chancellor to back these proposals. Should these changes be enacted, it would be a significant boost to the VCT market.
Other possible improvements include increasing the age limits on qualifying businesses, as well as the asset size of the company: the so-called “gross asset test” – currently set at an upper limit of £15m. The VCTA wants to increase this to £30m[1].
Broaden business support
This would better enable VCTs to support regional businesses and under-represented founders. Many of these businesses typically take longer to get off the ground or may require more capital spend, e.g. a manufacturing business in the Midlands. The current rules favour more capital-light businesses, usually software and tech. These companies tend to cluster around the south-east of the UK.
Making these reforms could be an easy win for Rachel Reeves. Firstly, many of these proposed changes are cost-neutral, with little to no upfront cost to the Treasury. Secondly, the government is eager to support growth; increasing the flow of growth capital into younger and growing businesses would meaningfully encourage this goal.
Unlike pensions, where investors can bung their money into global index trackers and the like – doing barely anything for the UK economy – VCT investment directly benefits British businesses. Here’s hoping this is recognised at this year’s budget announcement.
By Peter Hicks, research analyst at Chelsea Financial Services
