The expected rise in capital gains tax could attract investors towards venture capital trusts, experts say, because the vehicles are exempt from both capital gains and income tax.
The coalition Government has said it will move to tax non-business capital gains at rates similar or close to those applied to income, which could result in a rise of as much as 50%.
Patrick Reeve, managing partner of VCT investor Albion Ventures, says the secondary market for VCT shares could get a boost.
“If you can buy shares at a relatively high discount, when it is time to sell them investors will not have to pay capital gains on any narrowing of the discount,” he says.
Barry Anysz, a divisional director and VCT specialist at Rensburg Sheppards Investment Management, agrees.
“With a possible top CGT rate of 50%, the benefits of realising a profit from a VCT share versus a non-VCT share is easy to see. Added to this, dividends from a VCT share holding are entirely free of income tax and, again, with the highest rate at 50% there are clear advantages over non-VCT shares,” he says.
Anysz would also like to see the new Government ease the restrictions on VCT investments which limit payments into companies with no more than 50 staff and assets of £7m or less to just £2m.
“The legislation is particularly unhelpful to those VCTs which focus on investing in companies on AIM, which tend to be larger than private and unquoted companies,” he says
“If limits were raised this would ease the equity funding gap of between £2m and £10m, especially at a time when banks are still reluctant to lend.”
Reeve would like to see inheritance tax relief for VCTs, bringing them into line with enterprise investment schemes (EIS).
“It would be a cheap tax relief for the Government, because it would encourage VCT investors to be even longer term than they already are,” he says
“This in turn would mean that, because VCTs are evergreen funds, with the sales proceeds of investments being re-invested in new opportunities, the one-off cost of the up-front income tax relief pays for multiple uses of a VCT’s funds.”
