VCTs face changes following Autumn Statement

Even if it is not within the context of a share buyback, if an investor sells their VCT shares and buys shares in the same VCT within six months, they also will not qualify for the upfront 30 per cent income tax relief you receive when you invest in a VCT new issue of shares.

They would still be able to receive tax free dividends, however.

Read more about the attractions of VCTs

And investors can still sell their shares in a VCT and qualify for tax relief if they reinvest them in a different VCT within six months. VCTs will also continue to be allowed to buy back shares from investors.

This change will take effect from April 2014.

Recent Enhanced Share Buyback offers

Source: Tax Efficient Review

Nominees

Another significant change for private investors will be the ability to hold VCTs via nominees rather than directly, which means that investors may be able to buy VCTs directly from platforms. Currently, VCT shares have to be subscribed for by individuals in their own name if they want to qualify for the tax reliefs, although shares can subsequently be transferred into the name of a nominee without affecting the tax relief available, so they can hold them on a platform.

"This is a big step forward in facilitating the purchase of new VCT shares through platforms - great for advisers and their investors," says Michael Piddock, business line manager for VCTs at Octopus. "We have already entered into discussions with a number of platforms in anticipation of this."

Buying directly via a nominee, as many investors do with shares and funds, will make it significantly easier to administer and manage VCT investments. "Subscribing directly via a nominee will be of particular benefit to investors who participate in VCT dividend reinvestment schemes," adds Richard Troue, head of VCT research at Hargreaves Lansdown. "At present, an investor who holds a VCT in his or her own name and participates in a dividend reinvestment scheme will normally receive a share certificate for the additional shares once the dividend reinvestment has taken place. The advantage therefore is mainly administrative as this paperwork can really mount up over the long term. If the VCT was held via a nominee/on a platform it would eliminate the need for share certificates to be sent to the investor. They could also view and manage all their VCTs in one place."

However, after April 2014, platforms will no longer be able to receive commission on sales of investments, so they will not be able to rebate commission to investors who may face platform charges. This means it might be less efficient to buy VCTs from a platform than from an execution-only broker off platform. Execution-only brokers selling off platform will still be able to take commission on sales of VCTs.

"We will consider selling VCTs off our platform, but it will be cheaper to do it off platform," says David Scriven, director at discount broker ClubFinance.

Full details of the proposed rule changes have yet to be announced, but following consultation the government intends to legislate on this in the Finance Bill 2014.

"Once there is certainty we will be able to decide whether any changes to the way we sell VCTs are necessary," adds Mr Troue.

Dividend payments

It was also announced in the Budget that the government will consult further on the use of converted share premium accounts to return capital to investors where the return does not reflect profits on the VCT's investments. The government is concerned that VCTs are not necessarily putting as much money as they could into early stage companies, using funds raised to pay dividends before investment.

If VCTs can no longer use converted share premium accounts to return capital, it is more likely to be a problem for younger VCTs that have not built up substantial investments and are not making profits from exits. But it could also be a problem for more mature VCTs that use reserves to smooth their dividend payments even in years when they do not have profits to distribute, according to Martin Churchill, editor of the Tax Efficient Review.

If this change goes ahead it could also impact Planned Exit VCTs launched in the next tax year who usually do not earn enough in the early years to support dividend payments.

According to HM Revenue & Customs, many VCTs have been taking advantage of converted share premium accounts to some extent. For example, over the last few years, most VCTs have committed to paying dividends of at least 5 per cent a year of the amount invested to investors. In many cases, these dividends have been paid not wholly out of profits which the VCT has realised on its investments, but wholly or partly out of share premium accounts.

HMRC says that one VCT paid out tax-free dividends totalling over £600,000 from its share premium account within its first 18 months of issuing the relevant shares. This was while showing a loss of £47,000 on its accounts and before it had put the required 70 per cent of its funds into qualifying investments. VCTs have to put 70 per cent of their money into certain types of companies and investments.

The government will consult with the industry on appropriate solutions in January and will publish draft legislation soon after this, with the aim of legislating in the Finance Bill 2014.

MBOs

VCTs are also having to deal with European legislation that prevents them from investing qualifying new money raised after 5 April 2012 in management buy-outs (MBOs).

VCTs can still invest non-qualifying funds - 30 per cent of the total - in MBOs, while all the money raised prior to April 2012 can also be invested in this kind of deal. For a number of VCTs, the majority of their funds were raised before this date.

VCTs can hold aside some of the money raised before April 2012 for investments into MBOs, using the money raised after for non-MBO investments, running expenses and dividend payments. And when a VCT exits an MBO, the money from that investment can go into another MBO.

For this reason, a number of managers do not feel the new legislation is a major hindrance.

"This may be a concern for VCTs which are not raising regular new funds, or have too high a level of realisations, but generally not for mature VCTs such as ours," says Bill Nixon, managing partner at VCT manager Maven Capital Partners. "These VCTs are in a very strong position to continue to do MBOs, having been established under previous tax regimes when the rules allowed more flexibility in terms of the type of transaction the funds could be used for. When our VCTs raise new funds those new monies can be used to pay expenses and dividends, and undertake standard share buybacks. That means that the VCTs can largely preserve the old money and use it to invest in a wide variety of transaction types, including MBOs."

However, some managers may hold back from fund-raisings if they cannot buy MBOs as these are considered to be an attractive type of deal to invest in, and it will make it much harder for new VCTs which take a generalist approach.

Increased interest

VCT industry participants report increased interest in VCTs from investors this year with a number already having launched (see below). The Northern VCTs linked offering has already sold out, though these funds usually sell fast because of their strong performance record.

Forthcoming fund-raisings have also been announced, and these include the British Smaller Companies VCTs looking to raise £30m, and the Baronsmead VCTs looking to raise £35m.

Read more on getting in early

More than one in six people investing in a VCT this tax year will be doing so for the first time, according to a recent study by Albion Ventures. It also finds that 31 per cent of advisers predict increased levels of interest among their clients in VCTs this tax year compared to just 3 per cent who forecast a fall in support.

Reasons for increased interest include the reduction in the pensions lifetime allowance from the current £1.5m to £1.25m after 6 April 2014, and the annual allowance from £50,000 to £40,000. "More and more investors are looking to VCTs as a complement to their pensions as the lifetime limit reduces," says Mr Piddock. "And investors at the end of their careers who feel they do not have enough in their pensions and want to make extra contributions, but are hitting the yearly allowance are also using them."

Albion's survey finds that the top three reasons why their clients are backing VCTs are tax-free dividends; they have used up their individual savings account (Isa) contributions and the new limits on pension contributions.

A further 11 per cent of advisers believed their clients would be investing in VCTs as a means of improving their portfolio diversification, while 10 per cent attributed rising VCT popularity to the fact that independent financial advisers (IFAs) have become increasingly familiar with the sector, adds Albion.

"VCTs are set to attract many new investors this tax year and this is underlined by our own experience as we're seeing interest from an increasingly wide range of potential investors, from young professionals to the comfortably retired," says Patrick Reeve, managing partner of Albion Ventures. "The findings also suggest that advisers have become more familiar with VCTs, possibly as a result of the Retail Distribution Review, and as a result feel confident recommending them to suitable clients."

Open generalist VCTs

Source: Tax Efficient Review

Open Aim VCTs

Source: Tax Efficient Review, Clubfinance

Open specialist VCTs

Source: Tax Efficient Review

Open planned exit VCTs

Source: Tax Efficient Review