Finely crafted investments



The Chancellor's November Budget

Posted by Paul Jourdan on 15/Dec/2017

There was some unusually intense speculation this year about what changes the November Budget would bring to the VCT legislation, stoked up by the consultation around the Patient Capital Review. Fortunately much of this was well wide of the mark. As it turned out the changes in the budget were not just benign, we see them as a significant endorsement of what the VCT and EIS schemes do. They signal a clear ongoing commitment to addressing the funding gaps faced by smaller companies in the UK, whilst at the same time introducing some new measures to make sure that tax advantaged money does not end up going to disguised capital preservation schemes. A new Risk-to-Capital condition will be introduced for qualifying investments, which is an elegant means of focusing the schemes more precisely. If HMRC take the view that capital is not sufficiently at risk, then they can decline to give an Advanced Assurance for the investment, without investigating any further. This will free up sufficient time to break the very extensive log jam that has emerged in obtaining such approvals. Beyond this from 6 April 2019 VCTs must be 80% invested in qualifying holdings, a rise from the current 70% required level, and 30% of new funds raised must be invested in qualifying holdings within one year from the end of the accounting period in which the shares are issued. These new rules ensure that a greater proportion of VCT funds go into qualifying investments than may previously have been the case. The Amati VCTs have held qualifying investments above the 80% level for many years now, however, so these new rules won't change the way in which they operate. Finally, the annual limit which a "Knowledge Intensive" company can raise in any 12 month period has been raised from £5m to £10m, which is also a welcome development.

In addition, the quirk in the legislation around mergers which had been preventing the Amati VCTs from merging, has been amended, and we are grateful to HMRC for the very positive way in which they engaged with us over this point earlier this year. The possible merger outlined in the recent Prospectus can now be progressed and we expect firm proposals to be sent to shareholders in due course. It is worth noting, however, that under the new rules, once an investor knows that two VCTs are likely to merge, they will be not be able to claim income tax relief if they buy one having sold the same value in the other within six months either side of the purchase date. We would advise shareholders to seek professional advice if they are planning to invest in one of the Amati VCTs having sold the other one, or whilst intending to sell the other one.

HM Treasury has also now published its response to the Patient Capital Review consultation, which touches briefly on Business Property Relief (BPR). This is the relief which after two years allows a large number of AIM investments to be exempt from inheritance tax. For AIM investors such as Amati, there is a very important sentence in this document: "The government will keep BRP under review, and is committed to protecting the important role that this tax relief plays in supporting family-owned businesses, and growth investment in the Alternative Investment Market and other growth markets." In our view AIM has become the best functioning stock market in the world for companies capitalised from £15-500m, and it has taken 22 years of careful nurturing through government policy to achieve this. It is very encouraging for the future to see such a strong endorsement of AIM in HMT's response paper.