VCT pulls issue over concerns about possible future changes in VCT rules

At the start of August the Treasury issued a consultation paper entitled “Financing growth in innovative firms”. It was focused on “patient capital”, with a review of existing investment incentives and a section on “how to support greater retail investment in patient capital”.

In chapter 6 of the document, a section headed “Relative costs of current interventions” notes:

“…the upfront Income Tax relief provided through the schemes encourages a subset
of investors and fund managers to use them for ‘capital preservation’ investments. This typically involves investment in lower risk, often asset-based companies that generate stable returns without aiming for significant growth. Even with no growth in capital and low dividend payments, an investor will see a healthy return. Industry estimates suggest that the majority of EIS funds (which are distinct from VCTs and invest on behalf of EIS investors) had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation.”

At the end of the chapter, one of the consultation questions is “Are there areas where the cost effectiveness of current tax reliefs could be improved, for example reducing lower risk ‘capital preservation’ investments in the venture capital schemes?”

Albion Venture Capital, which on 6 September launched a joint fundraising with the other Albion VCTs, announced 6 days later that it has “… decided to suspend its offer until it is clearer as to what categories of investment by VCTs will be permitted in the future”. The Trust said that the decision “…was made in light of ongoing discussions in respect of investment in asset-based businesses following publication of the consultation document” and that “It is anticipated that changes arising out of the consultation are likely to be made in the Autumn Budget, which is expected in late November or early December”.

Albion Venture Capital says it “invests solely in asset-based businesses”, and a look at its portfolio confirms this. The VCT’s sudden change of heart on capital raising and its comments point to a Treasury clamp down on asset-backed schemes in the Autumn Budget.