Simple product for investors, complex rules for managers

Dr Paul Jourdan, CEO, Amati Global Investors

View the Amati Global Investors VCTs

VCTs remain a very simple investment product from the end user’s point of view, as long as they don’t invest any more than £200,000 in any tax year.  The investor benefits from a straight forward and clear tax regime, and reclaiming 30% of the investment value against income tax is made easy on self-assessment tax forms.  In addition offer documents provide high levels of disclosure, and each VCT will be governed by an independent Board of directors.   However, 2015 saw a huge upheaval in the legislation governing the kinds of investments VCTs will now be able to make, and have increased the complexity of the rules which VCT managers now have to deal with by a big factor, and this creates a new area of risk. 

For investors wishing to understand the nature of these rule changes, it is helpful to think of two underlying currents.  The first is the desire of officials at HM Treasury to achieve a better return on their investment in VCTs by reducing the number of loopholes which allow managers to adopt investment policies aimed at delivering the tax break to investors whilst taking the minimum possible level of risk. In 2015 this current led to all forms of electricity generation becoming non-qualifying for VCT investment, and with the introduction of a new clause to require qualifying investments to be made for the purposes of “development and growth”. 

The second current comes from the need to persuade officials in Brussels that the VCT legislation is compliant with EU State Aid legislation.  It was this which lay behind the introduction of the £5m annual investment limit in 2014.  Likewise in 2015, it was the root of the addition of the £12m lifetime limit, the age limit, and the prohibition of providing funding for acquisitions.  For each of these rules the sanction against a VCT is no longer just that a holding becomes non-qualifying, but rather that the VCT loses its status.  The consequences of such a loss would be devastating for all concerned.

How do AIM VCTs fare under the new rules?

We believe that the new rules leave AIM VCTs well-placed.  VCT qualifying investments on AIM have nearly always tended to be in growth companies and very much in the spirit of the legislation.  The new rules will mean deals take longer to complete, and will require us as a group of managers collectively to agree ways in which we can obtain from investee companies the right level of warranties in regard to the new rules.  It is the norm for AIM VCTs to invest with non-VCT funds, and this raises the possibility that we can provide working capital and business expansion to a company which is also raising money from non-VCTs at the same time to fund an acquisition.  Many of our investments are in “knowledge intensive” businesses, but there is still a good deal of clarification required to be sure how this set of exemptions will work in practice.

AIM VCTs are also all “evergreen” VCTs, where qualifying investments can remain in the portfolios, maturing over a long period of time.   This means only a relatively small part of the portfolio is changing each year.  A new investor in a top-up style offer (as opposed to a “C” share) which is small in relation to the size of the existing VCT will benefit from the existing portfolio, and the dependence on new investments is therefore much reduced.  What is likely to matter most is the investments already in place.

AIM VCTs have been an important component of funding and advice for companies floating on AIM for many years now.  Whilst there will be a pause during which the complexity of the new rules is worked through, we believe that this can continue in good health for many years to come.