Time is running out on to max out on VCT tax relief

To remind you, the upfront income tax relief available on investments in new VCT shares will fall from 30% currently to 20% from 6 April. That’s a chunky reduction and it seems to be prompting a rush to grab the higher level of relief while it’s still available.

There’s precedent for this: the last time that VCT income tax relief was cut, from 40% to 30% in 2006, VCT sales fell by 65% over the following year, as the Association of Investment companies noted.

In which case, if you’re considering making a VCT investment in the current tax year but have not yet done so, it’s a good idea to make a decision sooner rather than later. VCT managers almost always cap the amount of money they raise each year because they don’t want to end up with more cash than they can comfortably invest given the investment opportunities available. The most popular funds then sell out before the tax year ends – this year, that may happen even sooner.

That said, it’s important not to make investment choices purely for tax reasons. You need to be at ease with the investment case for VCTs – the idea is to make attractive long-term returns from early-stage businesses – and in the risks these funds carry.

The small and immature businesses in VCT portfolios are by their very nature riskier. Only think about the tax benefits once you’ve worked through this risk and reward profile.

Looking beyond this tax year, it may be that VCT fund-raising does not fall as precipitously as it did the last time tax breaks were reduced. For one thing, there are fewer tax-efficient investment vehicles available today than in the past; contribution limits on private pension plans, for example, are now lower.

Also, other Budget changes to the VCT rules should not be overlooked. As well as cutting upfront relief, the Chancellor raised the amount of money that VCTs are allowed to invest in individual companies from £10m to £20m – and up to £40m in “knowledge intensive” companies. She also doubled the maximum size of companies eligible for VCT investment, from £15m to £30m.

In practice, that may enable VCTs to take larger stakes in businesses that are further along the scale-up path – in other words, businesses that have done more to prove they will be commercially successful. That has the potential, in theory at least, to reduce the risk profile of VCT portfolios and to support long-term investment performance.

Budget announcements always give rise to lots of noise, particularly when they concern popular schemes and reliefs. At the end of last year, the investment platform Wealth Club surveyed VCT investors and found 42% planned to stop putting money into these funds once the tax relief comes down in April.

It will be a great shame if all those investors carry through on that threat – for VCTs and the companies in which they invest, but also for investors themselves. VCTs will continue to offer interesting opportunities, potentially with less risk, even after April’s tax change. Just as you shouldn’t invest purely to secure a tax break, you shouldn’t stop investing just because that tax break becomes less generous.