Stock Market Losses Mean Hard Times For UK's VCTs

by Jason Gorringe, Tax-News.com, London

18 February 2002

Stock market losses have meant less interest in tax shelters designed to offer effective protection from tax for the gains raked in by many investors and bankers during the bull market that ended last year.

In the UK, Venture Capital Trusts were introduced along with an attractive tax regime meant to attract investment into the British film industry, initially in 1992 and then in enhanced form in 1997. They allow production costs to be written off against tax, initially over a three-year period, now over one year. The concession applies until July 2005.

Investments into film partnerships can be very useful to people with serious amounts of income or capital gains to shelter, and who have substantial amounts of surplus cash. Martin Churchill, editor of the Tax Efficient Review, says: "They offer unusually broad cover, allowing you to shelter unlimited amounts of both income and capital gains."

They also have the advantage of sheltering tax due on current and preceding year income and gains, and allow recovery of income tax paid for three years back. They are used typically as an income tax shelter for people who are exercising large share options or have received big bonuses.

VCTs have pulled in more than UKP1.5bn in investment in the last 5 years, but now they are suffering from a dearth of suitable investors.

Gartmore, one of the London houses that has specialised in VCTs, is pulling the plug on its planned Premier VCT after failing to raise enough cash from investors for the venture capital trust. The fund manager had hoped to raise a minimum of UKP3m from the offer, but had only managed to secure UKP850,000. Those who have invested will get their money back.

Patrick Connolly, associate director at Chartwell Investment Management, the independent financial adviser, said: "Even with respected fund manager Gervais Williams at the helm, they could not raise sufficient funds to launch the product. This represents a big loss of credibility for Gartmore and is likely to deter other providers from offering VCTs."

VCT sales traditionally pick up with the end of the tax year in sight. But sales got off to a slow start last autumn, and have yet to show much sign of life.

Martin Churchill says: "While last year's VCTs raised UKP430m, this year we expect the figure to reach only UKP150m. The problem is that investors have losses to nurse rather than gains to shelter."