Officials in the venture capital trust industry fear investors could pull out of the market from April 2006 unless the Treasury allows VCTs to become exempt investments under inheritance tax rules.
Chancellor Gordon Brown announced in the April 2004 Budget he would reform tax rules on VCTs by removing the 40% capital gains tax deferral but extend income tax relief from 20% on £100,000 to 40% on the first £200,000 per annum and allow capital gains to be distributed as tax free dividends until April 2006.
That has left firms concerned about the attractiveness of VCTs as a tax-efficiency investment from next year, as firms worry investors will withdraw their monies after three years – the minimum period assets must be held in VCTs to make them eligible for tax advantages – unless the Treasury announces changes which maintains venture capital as appealing to high net worth investors.
Patrick Booth-Clibborn, head of retail broking at Noble & Companies - sponsor of several VCTs in the market – says the British Venture Capital Association along with PricewaterhouseCoopers and other VCT providers have been lobbying the Treasury to qualify VCTs for IHT relief.
“The worry is everyone will pull out of the [VCT] funds after this 2006 date and then claim mis-selling, because people have to hold investments for three years to claim the tax relief but will not see the investment gains,” says Booth-Clibborn.
“If the tax relief was cut back to 20% again in 2006 with no CGT deferral, it will cull the market. If the chancellor withdraws the extra 20% offered last year he needs to replace the tax relief with something attractive as some VCTs need to be invested for at least five years and there is a worry people will pull out after three years,” he adds.
There are currently 37 VCTs available to investors with another five in the pipeline according to Justin Modray, head of communications at BestInvest, and there has been much more demand for VCT investments among high net worth investors in the last year as the market is now 3 ½ times larger than in 2003, with around £800m of investment supply.
Booth-Clibborn is also predicting Enterprise Zone Trusts and Film Partnerships will also be withdrawn by the government soon in favour of VCVTs and Enterprise Investment Schemes.IFAonline
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