Following a very brief comment about venture capital trusts (VCTs) made by the Chancellor in his pre-Budget report, the question is whether the tax perks of these funds are going to be watered down in the next tax year. VCTs are tax-efficient funds that invest in small and unquoted companies.
A sentence in the briefing papers said: ‘The government remains committed to ensuring the long-term sustainability and success of the VCT market, and will announce the future level of VCT reliefs at Budget 2006.
The intervening period will allow further analysis of trends in the VCT market and continued dialogue with key stakeholders.’
In the tax year 2004/05, the Chancellor announced a temporary increase in the income tax relief on VCT investments from 20 per cent to 40 per cent. This generous 40 per cent relief remains for VCT investments made in the current tax year.
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Under HM Revenue & Customs rules, VCTs have three years to invest 70 per cent of their fund assets in qualifying investments, mainly newly issued shares in companies in approved sectors. They also enjoy a number of tax breaks. In addition to all returns within a VCT being free of income tax and capital gains tax, investments in a VCT also attract income tax relief of 40 per cent, reducing the effective cost of a £100 investment to £60.
One possible change could be that income tax relief is brought back down to 20 per cent. Or it could even be brought down in stages to, say, 30 per cent in the next tax year and 20 per cent in the following tax year.
If these income tax reliefs are reduced, the Treasury could introduce other tax perks for investors to compensate, perhaps even exempting VCTs from inheritance tax after two years, in line with many shares listed on AIM, the junior stock exchange.
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Levels and bases of, and reliefs from, taxation are subject to change. |
