Investors in Rensburg AIM VCT face tax blow

Rensburg AIM VCTs' shareholders will be sent a circular with wind-up proposals around 20 June.

The VCT has recently made a number of successful realisations so its board says the point has been reached where shareholders are best served by a wind up and return of funds as investments are realised. Rensburg AIM VCT would have three years to dispose of its assets under VCT regulations, during which it would not need to make further investments.

However, private investor representative group ShareSoc opposes the wind-down arguing that this could have major tax consequences for some investors, particularly those who claimed capital gains tax (CGT) roll over relief during the early years of the VCT's existence.

If you invested in a VCT before 5 April 2004 you could defer capital gains, but since then this is not possible. "An HMRC survey of VCT investors published in April 2003 revealed that 43 per cent of respondents had used a VCT investment to defer a capital gain," says David Scriven, director at discount broker Clubfinance. "Although many investors may have revived their gains by now, this indicates there could still be a large number of early VCT investors sitting on a deferred gain."

If investors who have deferred CGT by investing in a VCT sell its shares, or the VCT is wound up, then the capital gain is rolled back into liability and they are likely to end up with a tax liability. This could be near to the current market valuation of the shares being held. So although investors in this position would receive cash from the wind-up this might be offset completely by their tax liability.

Investors could avoid the tax liability by using up their annual CGT allowance over the three years that the VCT is wound up. The annual CGT allowance is currently £11,100, and on top of that investors could realise other tax losses if they have any.

After that gains are taxed at 28 per cent for higher rate and 18 per cent for basic-rate tax payers.

You can defer capital gains by rolling them into an Enterprise Investment Scheme (EIS) but these can be very high risk investments. ShareSoc suggests that Rensburg AIM VCT investors who used the fund to defer capital gains should consider getting professional advice on what to do if the VCT winds up.

ShareSoc adds that winding up a company usually incurs significant accounting and legal costs.

It says: "Would it not be better to arrange a merger with another VCT so the tax liabilities were avoided? The winding up of Venture Capital Trusts (VCTs) is exceedingly unusual partly because of the tax implications mentioned above, but also because of the difficulty of disposing of the investments in small private companies. If the VCT continued or a merger was implemented, those investors impacted by the roll-over relief issue might benefit substantially while others would not be prejudiced. The latter could always sell their shares in the market to liquidate their holdings if they have held the shares long enough not to prejudice income tax relief, as most will have done."

But Barry Anysz, divisional director at Investec Wealth & Investment which manages Rensburg AIM VCT, says its investments are in Aim listed companies which it could exit in a reasonable period, and blue chip stocks which could be disposed of almost immediately, so liquidating the VCT over three years would not be difficult.

Mr Anysz also says that they do not know how many shareholders in the VCT have used it for CGT deferral, and notes that a number of the original shareholders have sold their shares or died. He adds that in a survey of Renburg AIM VCT's shareholders conducted in 2014 most respondents wanted to continue the VCT in its current form and wind it up when appropriate.

He also argues that if the VCT is wound up then investors could put the proceeds into new VCT shares and get a 30 per cent tax break, whereas if the VCT is merged into another, or appoints a new manager, they cannot. He also says that a wind-up would be cheaper than a merger or manager change, and that the only rationale for the latter option is not to incur CGT.

Rensburg AIM VCT's board has had conversations on a merger with several VCT managers and says: "No suitable merger partner has been identified which the directors have felt able to recommend to shareholders and the board believes the proposal to wind up the company is the best option."

Managers interested in a merger include Maven Capital Partners which runs six generalist VCTs. It has proposed to Rensburg AIM VCT's board that it takes over the fund and implements the generalist investment strategy used by its other VCTs. This would involve building a composite Aim and private equity portfolio with the objective of expanding the asset base and improving the net asset value (NAV) total return.

Maven says that doing this would enable Rensburg AIM VCT to raise additional funds for new investments and co-invest in private company transactions with its other VCTs.

Maven took over Bluehone AiM VCT2 in February 2011 which it renamed Maven Income and Growth VCT 5 (MIG5). Maven says that since then it has expanded its portfolio, significantly grown its revenue base and increased dividends by more than 65 per cent - as well as raised £8m in three successful top-up offers alongside the other Maven VCTs.

Investors Chronicle data shows an improvement in this VCT's NAV and share price performance since about 2012.

But Maven says while it has presented Rensburg AIM's board with a formal merger proposal it has not received a response.

ShareSoc says that the Rensburg AIM VCT and its shareholders would need to consider the costs of any proposal from Maven in terms of the management fees, as this might have a significant impact on returns. Maven, however, says that it would run the VCT for the first two years for no fees.

Rensburg AIM currently has an ongoing charge of 2.91 per cent, while the Maven VCTs have ongoing charges including performance fees ranging between 2.59 and 6.19 per cent, with Maven Income and Growth VCT 5 on 3.59 per cent.

Cumulative performance of VCTs

Source: AIC using Morningstar as at 30 April 2015. Table shows share price total return on £100 lump sum with 3.5% expenses taken into account.