Budget 2006 changes to Venture Capital Trusts (VCT's)

In an attempt to dampen the feverish activity in the venture capital industry, the chancellor has cut upfront income tax relief on VCTs from 40 to 30% from April 6 this year. Venture Capital Trusts are funds that invest in smaller and unquoted companies.

Additionally, in an attempt to encourage long-term investment, the minimum holding period in order to claim tax relief has been lengthened from three to five years.

There is general consensus in the industry that changes were not unexpected and in fact could have been worse. The effect of the tax reduction will be to dampen demand to a manageable level as there is already a shortage of quality investment opportunities on offer for the billion or so pounds raised in the last two years. The holding period extension is not regarded as onerous as many VCTs tend to exit around five years down the track anyway.

There was some dismay, however, at the chancellor’s decision to restrict investment by the size of the company. To be eligible to receive VCT funding, a company’s gross asset value must be no more than £7m (formerly £15m).