New laws will catalyse VCTs, says AIC

George Osborne’s "Budget for growth" has brought some positive changes for the VCT sector, boosting its role as a supporter of UK SMEs (small and medium-sized enterprises).

In addition, the much anticipated details of the Junior ISA are a welcome step towards encouraging tax-efficient saving for the next generation.

Recent research conducted by the AIC highlighted that VCTs were helping to fill a funding gap for SMEs. However, VCTs were threatened by the European state aid rules which restricted the amount that companies could invest in smaller companies and also the size of the companies themselves.

Moves announced in the Budget to reverse these limits will no doubt be welcome news to VCTs and those companies that require additional financial and advisory support in order to take their businesses forward.

Previously constrained to investing in those with up to 50 employees and gross assets of £7m, VCTs would in future be able to invest in those with up to 250 employees and gross assets of £15m.

The amount of funding each of these investee businesses can receive has also been increased from £2m to £10m in a single year. Investors in VCTs retain a 30 per cent tax relief, and can invest up to £200,000 each year.

This vote of confidence in the sector has the potential to catalyse what was already expected to be a strong fundraising year for VCTs and it will be interesting to see if the final amounts raised reflect this positive sentiment.

Those investing in their children’s future will also be rightly encouraged by the introduction of the Junior ISA scheme (JISA). The JISA will be available to all children without an existing Child Trust Fund and will have a limit of £3,000 a year.

Upon reaching the age of 18, the child’s ISA will automatically roll over into the adult ISA wrapper, reducing potential administration costs and helping providers to offer a low-cost product.

Looking at the top-performing investment companies over 18 years, based on a £3,000 a year investment, the average investment company would return £121,109 and the top performer, HG Capital, £277,131.

For those families who are able to save the full amount, this will more than cover the increasing costs of higher education.

There is much to celebrate in this new Budget: VCTs have gained an opportunity to further prove their worth to the UK’s fledgling businesses and the introduction of Junior ISAs will enhance saving for the next generation.

With parents and young people becoming more incentivised to save, it is important that this move is accompanied by an increased focus on financial education.

For more information on children’s saving schemes and VCTs, download the AIC’s factsheets, which are available at www.theaic.co.uk.

Annabel Brodie-Smith is communications director for the Association of Investment Companies. The views expressed here are her own.