Some VCT managers are withdrawing their dividend reinvestment schemes at short notice. It could bode ill for the end-of-tax year offerings.

One of the features of VCTs, which is rarely commented upon, is the automatic dividend reinvestment. Most, but not all, VCTs offer this and there are three main forms:

1. The dividend is automatically reinvested in new shares issued at net asset value.

2. The dividend is automatically reinvested in new shares issued at the market price (generally around a 10% discount on the net asset value).

3. The dividend is automatically used to purchase shares in the market, at market prices.

The first two options count as fresh share subscriptions and mean that the investor qualifies for the normal 30% income tax relief. This can be particularly attractive when the VCT is making a relatively large special dividend payment.

However, after the three Northern VCTs announced special dividends in the Summer, they suspended their dividend reinvestment schemes at short notice, blaming the Summer Budget proposals and the need to consider “the possible impact of the proposals on … future investment activities”. In late August, Maven followed suit in respect of its six VCTs. The managers used virtually the same reason as their counterparts at Northern.

The fact that VCT managers are avoiding the retention of cash by suspending dividend reinvestment schemes suggests that they may not be anxious to raise fresh funds in the 2015/16 “end-of-tax-year season”. In 2014/15 Northern did not raise any funds, having raised £50m the previous year and Baronsmead raised only £4m (in a matter of days) against £40m in 2013/14. Both managers said that they had enough cash and did not want to add to their trusts’ liquidity.

It may well be that 2015/16 will also see reduced supply as managers assess the new regime, which will not be settled until EU state aid approval has been given and the Summer Finance Bill receives Royal Assent. Certainly, the HMRC projections published alongside the Budget show it expects this to be the case. These suggest that the impact of all venture capital scheme changes (VCT, EIS and SEIS) will benefit the Exchequer to the tune of £85 million in 2016/17.

As the £85 million  would mainly be derived from  EIS and VCT subscription income tax relief, the implication is that about £285m less investment will be made than previously expected. The total VCT investment in 2014/15 was £429m. EIS figures are not yet available for last tax year, but for 2013/14 EISs raised £1,457m. However, the division of reduced investment is probably skewed towards VCTs as the changes are more likely to impact them rather than EISs.

It could be lean times for VCT investors in the run up to April. Attractive offerings may be small and sell out quickly.

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