VCTs pulled back from the breach

Changes made to Venture Capital Trust rules in the recent budget will allow managers to sell holdings without breaching government regulations.

The rules state that the trusts must be 70 percent invested into ‘qualifying companies’ to qualify for the tax breaks that make VCTs popular.

The most recent budget gave managers a little more flexibility when selling investments, giving them six months to reinvest money from a sale which took them below the 70 percent invested threshold.

“If a manager goes below his 70 percent because he has sold something, he now gets six months to look for a new home for that money,” explains Bill Nixon, head of investments at Aberdeen Asset Management Private Equity.

“It’s an important requirement for managers to have that latitude not to worry about selling stocks because before you had the ludicrous situation where you could be forced to try not to sell a holding because it would take the trust into a breach.”

The fact that managers could take their trust into breach of the rules in this way had come about because of changes made in the 2006 budget. “The change made last year that came into force in April this year was that managers can’t hold lots of cash,” explains Richard Allen, head of tax shelter research at Allenbridge.

“Before, if a manager was in danger of not being able to be 70 percent invested in qualifying companies, he was allowed to take a chunk of his money and put it on non interest-bearing deposit.” It is this cash allowance, the ability to use non-interest bearing deposit accounts, that last year’s budget banned.

Not being able to use interest bearing deposits makes selling holdings difficult, adds Chelsea Financial Services VCT specialist Matt Woodbridge.

“Managers were faced with perhaps missing out on a good opportunity to sell a stock because it would mean they would no longer qualify for the tax breaks,” he says.

The six months grace period which now applies is the result of VCT managers lobbying the government about the inadvertent breach problem.

“Managers have been able to say, well, this is what could happen and a sensible way has been found to deal with the problem,” adds Woodbridge.

VCT managers however, are seeing a generally gloomier outlook for this type of investment.

“It’s good that the government has changed the situation regarding inadvertent breach,” says Nixon. “But, the budget in general wasn’t good news for new issues from this April. In fact with the last budget changing the gross assets test and now with these new restrictions on number of employees and company size I would call it death by a thousand cuts to VCTs.”