VCT managers dismiss Brexit impact on financing demand from smaller companies

05 September 2016

A survey of Venture Capital Trust (VCT) management groups by leading wealth management group Tilney Bestinvest has revealed that managers see little if any impact on demand for financing from UK smaller companies as a result of June’s vote to leave the EU. This is despite previous fears that such an outcome would lead to a deterioration in confidence and investment plans being put on hold with smaller enterprises being particularly vulnerable to any deterioration in outlook.

VCTs are investment companies which carry tax-incentives for investors, that specialise in providing expansion and development capital to small, young UK companies that are either unquoted or traded on the London Stock Exchange’s AIM exchange. The survey of 17 VCT management groups by Tilney Bestinvest revealed that 44% of VCT groups saw no impact on demand for VCT financing from businesses as a result of the EU referendum, while 31% expected the vote to lead to either ‘some’ or a ‘significant’ increase in demand for VCT financing.

Tilney Bestinvest believes private investor demand for VCTs will also be buoyant this tax year after a strong year for fund raising in 2015/16 as a result of further restrictions on pensions tax relief introduced by the previous Chancellor of the Exchequer, George Osborne, that came into effect this tax year.  In particular there has been sharp reduction in the Lifetime Allowance – the amount that can be built up in pensions over and above which a punitive 55% tax charge is applied at the point pension benefits are taken - from £1.25 million to £1 million. The Government has also introduced a new tapered annual pension allowance for higher earners to restrict access to pensions tax relief. This latter development means that, since 6 April 2016, individuals with taxable income greater than £150,000 have had their annual pension allowance reduced by £1 for every £2 they earn over £150,000, with a maximum reduction of £30,000. For those earning £210,000 or more, this effectively means that they will only receive an annual pension allowance of £10,000 rather than the £40,000 available in the previous tax year. That’s irrespective of the amount they have previously invested in their pensions, or indeed whether they have any pension savings at all. Significantly, the £150,000 threshold for the new regime is defined as ‘adjusted income’, which includes not just salary and bonuses but also any company pension contributions and other benefits such as medical insurance, as well as investment income. Tapering has the potential to impact many professionals, some of whom are expected to look at alternative tax-efficient savings schemes, including VCTs and Enterprise Investment Schemes (EIS), as a result of reduced capacity to invest in pensions.

Yet the Tilney Bestinvest research leaves a question mark over whether the VCT industry will be able to meet the potential increased demand with sufficient new fund raising capacity, as there is no strong consensus across groups in their expectations around the level of fund raising the industry will reach this tax year, having raised £457.5 million in 2015/16.  While 18% of respondents believed fund raising would exceed £500 million and a further 18% expected it would be between £450 - £500 million, some 64% of groups expected new fund raising at lower levels than last year.

Jason Hollands, Managing Director of Tilney Bestinvest, commented:

“It’s encouraging to see that those on the coal face of providing financing to smaller companies, are clearly indicating that the EU Referendum result is having no discernible negative impact on demand for development and expansion capital. On the contrary, a significant minority are indicating they believe the vote to carve a destiny for the UK outside of the EU will actually spur demand for venture capital financing as businesses look to new markets.

“Given this and the potential increased investor demand for VCTs as a result of increased restrictions on pension investment for higher earners, it may therefore seem strange to those less familiar with the VCT market that groups are not more bullish in their overall expectations for new fund raising. This is squarely down to greater restrictions on the universe of eligible investments that VCTs can make. These were introduced last November, ironically perhaps, to bring the UK’s tax advantaged venture capital schemes into line with European Commission State Aid directives. This has placed new restrictions on the age of companies that can receive VCT financing, how the funds can be used by companies and a lifetime cap on the overall level of such financing a business can receive through such schemes.  Alongside this, HMRC has also made energy generation, a once popular area for VCTs and EIS, an excluded activity.

“Having had two years of healthy fund raising, many VCTs already have cash to put to work and a number of managers have told us that there is mismatch in the pace of exits from previous deals undertaken when the rules were less restrictive, and finding new deals that meet the more demanding criteria. Fund raising plans at most individual groups are therefore not firm at this stage as it will ultimately depend on the level of cash they find themselves holding over the next few months. This may mean a slightly later start to the fund raising season than normal and we also expect some offers to be more modest in size as managers adjust cash requirements to a more focused opportunity set.

“In all we think investors contemplating VCT investment may need to act quite promptly if they want to access smaller fund raising offers from the highest quality managers, as shares are allocated on a ‘first come, first served’ basis and the most in-demand offers have the scope to achieve fund raising targets ahead of the end of the tax year.”



1. What level of new VCT fund raising do you expect to see this tax year?

2. Subject to Board approvals, do you believe the VCTs you manage will raise funds this year?

3. If your VCTs do raise new cash, how do you expect the amounts targeted will compare to last year?

4. What impact might the vote to leave the EU have on demand for VCT financing from smaller companies?


Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance is not a guide to future performance. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCTs are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.