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News - Revenue

29 March 2006
Categories: News

VCT investing

VCT investing

The new rate of income tax relief for investors in venture capital trusts will be 30%, as opposed to 20% envisaged in FA 2004, s 94, and the minimum period for which investors must hold their shares will rise to five years. As a result of this change, any money that a VCT holds (or is held on its behalf) after 6 April 2007 will be treated as an investment for the purpose of these tests, rather than as required under the old rules in TA 1988, s 842AA where a VCT must have 70% by value of its investments represented by shares or securities in qualifying holdings to gain and retain approval. It must also have no more than 15% of its total investments in a single holding in any company.
With regard to the enterprise investment scheme, the annual investment limit for income tax relief is doubled to £400,000. In addition, under s 289A, individuals who invest in eligible shares under the enterprise investment scheme during the first six months of any tax year can choose to treat up to half of them as if they had been issued in the previous year, and claim relief accordingly, subject to a maximum carry-back figure of £25,000. This figure is doubled from £25,000 to £50,000.
These new measures take effect from 6 April 2006, apart from the change to the 70% qualifying holdings condition for VCTs, which has effect from 6 April 2007.
The limit in the maximum size of companies able to raise money under enterprise investment schemes, venture capital trusts and corporate venturing schemes (the gross assets test) is reduced from £15 million to £7 million before investment and from £16 million to £8 million afterwards. This change will not apply in relation to funds raised by VCTs prior to 6 April 2006, nor to EIS or CVS shares subscribed for before 22 March 2006.
For EIS investments made by approved investment funds raising funds, the new gross assets test limits will not apply to investments which were approved before 22 March and which have started raising money before 6 April 2006.
Chris Ring, director of Shore Capital's Puma VCTs, says that the changes to the gross assets test for VCTs are going to make them 'significantly less attractive' as next year's trusts 'will not be allowed to compete for larger deals'. He suggests that this could 'increase the risk' for VCTs. Nigel May, tax principal at MacIntyre Hudson, agrees that this increases the risk, as 'smaller companies are normally by their very nature riskier'. Smith & Williamson say that this change was 'unexpected', but that it 'reinforces the Government's intention to boost investment in smaller companies only'.
The doubling of the investment limit for enterprise investment schemes gets a muted welcome, with Nigel May saying that it 'will no doubt help the very wealthy' who can afford to invest such amounts of capital.

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