Policy paper

Income Tax: encouraging more high-growth investment through Venture Capital Trusts

Published 22 November 2017

Who is likely to be affected

This measure will affect Venture Capital Trusts (VCTs), fund managers, companies seeking investment from VCTs and individuals who invest in VCTs.

General description of the measure

This measure changes certain rules on investments made by VCTs. The measure will:

  • insert a final date of 6 April 2018 in relation to the applicability of certain “grandfathering” provisions
  • double the time VCTs have to reinvest gains from investments from 6 to 12 months
  • require 30% of funds raised in an accounting period to be invested in qualifying holdings within 12 months after the end of the accounting period
  • require qualifying loans to be unsecured and ensure that returns on loan capital above 10% represent no more than a commercial return on the principal
  • increase the proportion of VCT funds that must be held in qualifying holdings from 70% to 80%

Policy objective

This measure helps to ensure that tax-advantaged VCTs continue to focus on long-term investment in higher risk companies that intend to grow and develop.

Background to the measure

The government published a consultation, ‘Financing growth in innovative firms’, on
1 August 2017 which asked for views on the value for money provided by the venture capital schemes, including VCTs. The government’s response document was published on the 22 November 2017.

Detailed proposal

Operative date

From the date of Royal Assent:

  • VCTs may no longer offer secured loans to investee companies, and any returns on loan capital above 10% must represent no more than a commercial return on the principal

From 6 April 2018:

  • the ‘grandfathering’ provisions affected by this measure will not apply to new investments made by VCTs
  • VCTs will be required to invest 30% of funds raised in an accounting period beginning on or after 6 April 2018 in qualifying holdings within 12 months after the end of the accounting period

From 6 April 2019:

  • the period for reinvestment of gains on disposal of qualifying holdings investments will increase from 6 to 12 months
  • the proportion of VCT funds that must be held in qualifying holdings will increase from 70% to 80%

Current law

The current VCT legislation is contained in Part 6 of the Income Tax Act (ITA) 2007.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to make a number of changes to VCT rules.

This measure amends certain ‘grandfathering’ provisions which preserved old rules in relation to funds raised, and monies derived from them, after the rules were changed. The measure inserts a date from which the provisions will no longer apply, of 6 April 2018, in the following legislation, with the following effects:

  • Paragraph 69 of Schedule 2 to ITA 2007 (which will apply the ‘no guaranteed loans requirement’)
  • Paragraph 81 of Part 8 of Schedule 2 to ITA 2007 (which will cease to allow certain activities such as property development)
  • Paragraph 3(6)(b) of Part 1 of Schedule 16 to the Finance Act 2007 (which will apply a limit to the number of employees in a qualifying company)
  • Paragraph 12(b) of Schedule 11 to the Finance Act 2008 (which will cease to allow certain activities such as shipbuilding)

In addition, Paragraph 70 of Schedule 2 to ITA 2007 will be amended to apply the “proportion of eligible shares requirement” to investments made on or after 6 April 2018.

Paragraph 6(2)(b) of Schedule 2 to Finance (No. 3) Act 2010 will be amended to ensure investments made on or after 6 April 2018, from protected monies raised before 6 April 2011, will count towards the 70% eligible shares condition as set out in section 274 ITA 2007.

Section 274 ITA 2007 will be amended to include a new qualifying condition for VCTs to invest at least 30% of the money raised in qualifying holdings within no more than 12 months after the end of the accounting period in which those funds were raised.

Sections 274, 275, 278, 280 and 280A ITA 2007 will be amended to increase the qualifying holding limit from 70% to 80%, to take effect for accounting periods starting on or after 6 April 2019.

Section 280A ITA 2007 will be amended to increase the time to reinvest the proceeds of disposals of qualifying holdings from 6 months to 12 months. This will take effect for disposals of qualifying holdings made on or after 6 April 2019.

Part 6 will be amended to specify that a qualifying loan must be unsecured and provide no more than a commercial rate of return on the principal, to include any loan interest, costs or charges payable to the VCT. Returns on loan capital of under 10% of the principal a year, averaged over 5 years, will be considered commercial.

Summary of impacts

Exchequer impact (£m)

2017 to 2018 2018 to 2019 2019 to 2020 2020 to 2021 2021 to 2022 2022 to 2023
- nil nil nil nil nil

The measure is not expected to have an impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

There may be a limited impact on individuals who invest in VCTs, as changes to the types of investments that VCTs make as a result of this measure may result in some changes to VCT investment strategy over the longer term.

There is no impact on households.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

Investors in VCTs tend to be affluent older people although younger people who invest in VCTs may also be affected.

After careful consideration, the government has concluded that there are no significant impacts on other groups of people sharing protected characteristics, and hasn’t identified any equalities impacts.

Impact on business including civil society organisations

This measure affects VCTs, VCT fund managers and companies that VCTs invest in. The changes are intended to ensure VCTs invest more funds in higher risk companies, more quickly. There are currently around 70 VCTs, and it is likely that most of these will have to make changes to their investment models to meet the new rules. Some investee companies may also find that loan conditions offered by VCTs change.

This measure is expected to have a negligible impact on VCTs’ administrative burdens. VCTs will incur one-off costs of familiarisation with the new rules and ensuring that their investments meet the new conditions. It is not expected that there will be any on-going costs.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The costs to HM Revenue and Customs (HMRC) of implementing these changes are anticipated to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The effect of the changes will be monitored. An evaluation of the Enterprise Investment Scheme and VCT schemes will be carried out in accordance with the state aid evaluation requirements.

Further advice

If you have any questions about this change, please contact Cathy Wilson on
03000 536678 or Martin Trott on 03000 585619, or email: venturecapitalschemes.policy@hmrc.gsi.gov.uk