UK: Tax breaks removed on two VCTs
14 March 2014
Posted by: Author: Richard Dyson
Author: Richard Dyson
Investors chasing tax relief by putting money into venture capital trusts have been dealt a blow.
HM Revenue & Customs this week said two VCTs – both portfolios run under the Oxford Technology brand – had broken the rules, and so have had their special tax status removed.
VCTs are much appreciated by higher earning investors as, provided that the trusts meet the requirements, 30pc of any investment can be offset against income tax. So a contribution of £20,000 would result in a £6,000 deduction from the saver’s income tax liability.
Dividends paid by the VCT are also free of tax.
The perks make VCTs highly popular at this point in the tax year, as individuals rush to invest before the April 5 deadline. In the current period, VCT providers are raising about £600m for a variety of portfolios. Their appeal has been improved with tax breaks on pensions being eroded.
The removal by the Revenue of the tax perks from these two portfolios is expected to spook investors. VCTs have been available for 18 years and such action has not been taken before. It could mean that the investors involved would have to repay tax, as well as face uncertainty if, for instance, the fund’s assets have to be sold quickly.
To be eligible for VCT status the funds can invest only in smaller companies. No holding can be worth more than 15pc of the fund’s total value. It appears in this case that one of the funds’ holdings exceeded the limit.
The managers of Oxford Technology are believed to have appealed against HMRC’s decision.
Jason Holland of broker Bestinvest, which recommends and sells VCTs to private investors, said: "The loss of VCT status could have serious implications. While this is undoubtedly news that should concern shareholders in these VCTs, it is also important to recognise that over £4bn has been raised in VCTs in two decades without such an event occurring.
"Loss of status is a potential VCT risk but this situation represents an isolated case.”
This article first appeared on telegraph.co.uk.