Summer school approaches for VCT managers

Venture Capital Trust managers traditionally use the Summer to decide how to raise funds for the next tax year. Despite the most recent round of restrictions on what VCTs can invest in, many managers are making plans for 2007-8.

The Finance Bill, which contains the recent changes, should receive Royal Assent in July. Some managers are waiting to see whether there will be any turnabout to changes announced in April, but this seems fairly unlikely.

Next tax season’s VCTs will not be able to invest in companies with more than 50 employees and will not be able to invest more than £2m into a company within 12 months. According to David Thorpe, manager of F&C’s Baronsmead trusts, the employee numbers constraint will halve the universe trusts can invest in.

Nonetheless, Thorpe thinks there is likely to be a £200m market for VCTs next tax year. At Hargreaves Lansdown VCT specialist Ben Yearsley agrees. “It will be a smaller and more specialised market and it will attract the people who have always been VCT investors,” he explains. While the large majority of recent investors have been in the market for the large tax breaks which have now been reduced Yearsley points out that there are long term investors in VCTs for the actual investment.

Octopus director Chris Hullat admits trusts will have to be carefully structured. “Like most people we’re thinking through the rules and trying to see what we can come up with that will be sellable and make profits,” he explains.

A product like Octopus’ recent protected trust will be difficult to put out as the type of companies it invested in would breach the 50 employee rule, says Hullat, but the company is talking to advisers and figuring out what its next offering should be.

At Close Enterprises, another of the winners in the 2006-7 season, manager Patrick Reeves is also optimistic. “There are plans to raise another £20m here,” he says. “What you can do is raise new money and co-invest it with money that is under the old rules. You just need to be careful to give a clear audit trail as to which deals are invested in which pot.” Reeves reckons around half of his old deals would conform to the new maximum 50 employee rule.

Investors looking at VCTs for this tax year could do themselves a favour by starting early. “There are about five or six VCTs still open now,” says Yearsley. “Most close at the end of next month, but now is not a bad time to go into them. If you get in now you know that the trust has raised its money and you can get your income tax paid back through your payslip over the year.”

1 June