Venture Capital Trusts: Will Autumn Budget overshadow £570m funding success?

Venture Capital Trusts (VCTs) raised £570m in 2016-17, according to data from UHY Hacker Young.

The amount of funding raised was up 28% compared to the £445m in 2015-16.

VCTs are designed to support smaller higher-risk trading companies in raising finance. Managed by fund managers, VCTs are eligible for a number of tax reliefs, and VCT investors currently receive a 30% tax break if they hold shares for a period of five years.

Yet, as the amount of funding has increased by 75% over the past five years and stands at its highest level in 10 years, VCTs are expecting to take a hit in the Autumn Budget, due to be announced by chancellor Philip Hammond on 22 November.

The chancellor is widely expected by the industry to announce measures that limit the assets in which VCTs can invest. In a consultation released in August this year, the government highlighted that VCTs were sometimes used for “capital preservation” and estimated that 25% of VCTs have “investment objectives characteristic of lower risk capital preservation”.

Andrew Snowdon, partner at UHY Hacker Young, said: “VCTs remain a vital and important source of funding for many small businesses, particularly with the current famine in bank lending to SMEs.

“VCT’s are a great British success story. We know that the Chancellor is currently engaged in an ongoing review of capital markets, looking at whether various tax reliefs are well targeted and deliver value for money. However, he should remember what an important industry VCTs are. They are a valuable source of funding for small businesses and, with diminished capacity in pension contributions, as a profitable asset class for investors.”

In the 2014 Budget, new measures were announced to amend VCT legislation, including restricting VCT income tax relief entitlement in cases where investments were associated with share buy-back, and removing capital gains tax exemption where VCT shares were sold within five years of acquisition.

It remains to be seen what the 2017 Autumn Budget has in store for VCTs and VCT investors.