A DROP TO 20% INITIAL INCOME TAX RELIEF?

[Retiringat51]

Chelsea Financial Services has written in its latest Viewpoint Magazine;

"There are concerns within the VCT space that HMRC could drop the income tax relief received by investors buying new VCT shares down from 30% to 20%. This potential change means a number of VCTs are opening earlier than usual this tax year, ahead of the November Budget. These early launches may mean that some VCTs complete their fund-raising activity ahead of tax-year end. Those looking to invest may wish to consider doing so sooner rather than later."

Do any Fools have corroborative information to impart about this speculation?

[onslow]

I wonder if Chelsea Financial Services has heard any scuttlebutt or if they are just trying to drum up demand...

Anything is possible, of course, but I'd note the recent HMRC Patient Capital Review is quite positive about continuing to encourage Retail investors in the VCT space. Reducing the tax relief would obviously not encourage demand.

The key question HMRC would ask is "would investment in VCTs continue if the 30% relief was reduced/removed?". The answer of course is yes, albeit at lower levels than currently. Thus HMRC wouldn't know how much money they'll "save" by reducing the relief to 20%, as demand for VCTs would likely drop and until they know how much subsequent demand there is, they wont know how how much tax relief is going to claimed.

Given the larger narrative of this government i.e. "need to prepare for post Brexit world", "encourage innovation/investment" etc etc I think it's more likely they'll tinker around obvious "abuses" of the VCT/EIS (i.e. removing asset backed investments from being eligible) rather than any wholesale changes.

Still, who knows!

[Retiringat51]

[quote]I wonder if Chelsea Financial Services has heard any scuttlebutt or if they are just trying to drum up demand.../quote]

My knee-jerk reaction as well, but they are right about early launches this year, and demand for it on present terms is already there in spades, too.

So, götterdämmerung if politicking sticks its oar in?

[Kidman]

I believe that any suggestions this far away from the November budget are merely speculation.

Anyway, I see it as very unlikely that new purchases either side of the budget would attract different rates, surely any change in relief rate would not take place until 2018/2019 on 6 April 2018. Hence I see no reason to try to buy before November just because of speculation. Better to buy the VCTs that one wants to buy (assuming they are available sometime in the financial year and one can get an allocation.)

If a change in the relief rate is being considered then HMT will be doing their usual advance modelling to estimate the effect on tax take. We saw a significant increase in VCT sales in the years when it was 40% but I don't think it would drop much if the rate was reduced to 20%, there is far more interest in VCTs these days especially in the light of recent pension changes.

I suspect the vast majority of VCT shares are still owned by their original purchasers which means that the value of the original 20% tax relief has in some cases now been spread over more than 20 years, less than 1% p.a. On the other hand the benefit of tax-free dividends in ongoing and perhaps far more valuable.