This compares to £219m the previous year. Another factor was the rumoured increase in VCT income tax relief, which caused some investors to hold off investing until after the 2009 Budget, which occurred after 5 April. There was no change to the income tax relief, but these investors may still invest in 2009/10.
Source: Association of Investment Companies
To put these figures in context, in 2005/06 the announcement that the rate of VCT income tax relief would be falling from 40 per cent to 30 per cent resulted in a bumper £779m year. Reflecting the reduced relief, 2006/07 fell to £267m and then further to £219m in 2007/08 as market conditions began to turn.
Looking to the current 2009/10 tax year, chancellor Alistair Darling’s tax hikes have focussed the spotlight on tax-advantaged investments. Jemma Jackson of the AIC comments: "There is no doubt that 2009 was a tough year for VCTs in terms of fundraising. Clearly it has been a difficult time for stock markets generally, and investors have been nervous across the board. Going forward, VCTs may well enjoy a renewed focus from investors in light of the increase in the higher rate of income tax to 50% in this year’s budget, not to mention the reduction in pension tax relief for higher earners."
Martin Churchill of Tax Efficient Review also foresees a better year for VCTs resulting from the Budget.
"The proposed budget changes to pensions and the top rate of tax will without doubt stimulate demand in the VCT market. I expect this to rise to around £225m in the current tax year and I anticipate that the Limited Life offerings will again take around half the funds raised and that the message in the Generalist category will be how crucial income is to investors."
The years 2009/10 should benefit from renewed stock market confidence generally, if it is maintained, and by City bonuses for some at least. Also, more financial advisers may look at VCTs for tax mitigation purposes, but ultimately investors’ risk appetite for these higher-risk investments will be key. The first new 2009/10 VCT offers have now opened and more are expected from September onwards.
Philip Rhoden is a director of Clubfinance Ltd. The views expressed here are his own.