Tax breaks fail to boost VCT market

INVESTORS ARE continuing to steer clear of the venture capital trust (VCT) market this year, with more than 80 per cent of the available capacity remaining unfilled, in spite of the introduction of more generous tax breaks, writes James Daley.

VCTs are funds which invest in start-up or young companies, and are designed to encourage private investment in smaller businesses. Last year, the tax breaks were changed to try to stimulate demand. Capital gains tax relief was ditched, and investors were instead offered a 40 per cent income tax rebate on all money that they invest in VCTs.

While this has sparked a flurry of new fund launches, investor demand has remained muted. So far this tax year, VCTs have managed to win just over pounds 180m of assets, according to Hargreaves Lansdown, the Bristol-based financial advisers. However, the 40 VCTs which have already launched are collectively looking to raise more than pounds 950m. Ben Yearsley, an investment manager for Hargreaves Lansdown, says a lot of trusts are going to be left disappointed. "I think the industry will raise between pounds 350m and pounds 400m in total this tax year, so that will leave more than half of the capacity unfilled," he says.

Yearsley adds that pounds 400m would in fact be a very good total, considering just pounds 45m was raised last year. However, he says the industry has been

over-optimistic. "A lot of them simply aren't going to raise any money," he says. "There are plenty of good ideas and good funds out there, but many of them are completely unknown names."

The 40 per cent income tax kickback is currently guaranteed only until April 2006, after which the Treasury will have to decide whether it wants to extend the offer, revert to the original tax breaks, or ditch VCTs altogether.

For a free VCT guide, call Hargreaves Lansdown on 0800 138 0456.