UK pension rule changes set to spur VCT activity Thursday 25 Feb 2016

UK pension rule changes set to spur VCT activity

The forthcoming changes to pension tax relief have led to an uptick in venture capital trust (VCT) business for three-quarters of VCT managers.

According to the Association of Investment Companies’ (AIC) latest annual VCT manager survey, the cap on higher rate taxpayers’ pension contributions and the reduction in lifetime allowance are seeing investors reconsider their options.

Complementary

Survey respondents said the changes to the pension regime gave them the greatest cause for optimism in 2016, with the caveat that VCTs should be used in conjunction with other savings and investment vehicles and not supersede existing financial plans.

The AIC cited qualitative research by HM Revenue & Customs, which showed that the VCT sector had outperformed the wider stock market since the financial crash of 2008.

The 2015 Finance Bill changes will open up VCT investments into more mature companies if they are ‘knowledge intensive’, with £20m ($28.2m, €25.6m) allowed over the investee company’s lifetime, as opposed to the current £12m threshold.

Further, the rule changes stipulate that ‘state aided’ investments – or those offering tax relief – should be to fund new growth and as such are no longer allowed to fund management buyouts or M&A activity.

“There is no doubt that it has been a tumultuous time for the VCT industry."

Almost half the AIC survey respondents said they were finding a similar number of investment opportunities than before the changes, while a fifth said there were more opportunities. Around a third of respondents said there were fewer than the year before.

Big challenge

There was a consensus that the new rules would present the biggest challenge for VCT managers in 2016.

Stuart Lewis, business line manager of venture capital trusts at Octopus Investments, said: “There is no doubt that it has been a tumultuous time for the VCT industry.

“However, the changes are quickly put into context as the minor evolution that they are, when contrasted with the shifting landscape for pensions over the last few years. With change comes opportunity, and at Octopus we are excited about what lies ahead for the VCT industry and the role it can play in supporting the UK economy as a whole.”

Citing the HMRC report, the AIC said around 65% of VCT investee companies attributed an increase in their sales to the VCT investment.

Technology was still the favoured sector, with healthcare – including biotech and pharmaceuticals – a close second. Construction and leisure & hospitality were also popular.