What will be the impact of Reeves' VCT changes?

0:11Hello and welcome to the FT Advisor podcast. I'm Chief Reporter Tara O 'Connor and today we'll be discussing venture capital trusts and the changes that are on the horizon. I'm joined by Oliver Bedford, Lead Manager on the Hargreave Hale VCT and Diana French, Chief Commercial Officer of Retail Distribution at Triple Point. At the end of 2025, the government announced that income tax relief on VCTs would drop from 30 % to 20%. This came as a bit of a shock to some of those in the VCT industry, but there was also a bit of positive news for the sector. with the VCT company investment limit being raised to£10 million from£5 million.

0:50These changes are all set to come in in April 2026. So first we could kind of dive into what those changes actually mean in practice for VCTs. If you want to start us off, Oliver. Sure. Well, I think there's no doubt that the proposed changes as announced in the budget are sort of fantastic news for VCTs and for the UK's innovation economy. it's become really clear over recent years that you know really through the inflation that's been a feature of everyone's lives that the current limits around annual limits for the amount raised and lifetime limits to as well as the size of a balance sheet all of which are laid out in in vct regulation were becoming a sort of inhibitor for investment into growth companies this was well recognized by lots of people and the consequence of a successful campaign run by the VST Association was that the government has agreed to increase those limits with effect from the 6th of April.

1:46Now what this means in practice is that we and other VSTs will be able to provide more capital to more companies and for longer too. But when you look beyond the headlines I think there's a more significant impact that this will bring into play because various companies if you think particularly companies which require significant R &D programs which require significant investment into plant machinery you know they are companies that have been struggling um to to access the scheme and they will now come back into scope and if you think about sectors such as deep tech or life sciences or indeed traditional um companies in the industrial sector and engineering sectors um they will be falling back into scope and and we'll be delighted to to support them as and when the new rules uh come into effect yeah it's interesting things and um obviously the other side of that is the change in income tax limits what impact do you think that will have Diana?

2:43Yeah I think I think that's a good question I think a lot of that is yet to be yet to be seen really so the only thing we have to compare it to was that income tax the upfront income tax relief changed quite some years ago so well over 10 years ago and went from 40 to 30 percent and what we saw was a decrease in the amount going into VCTs the year after so we saw quite a big year when it was 40 % and that was coming to an end and then when it was 30 % I think there was about a 60 % decline. Having said that I think we're in quite an interesting environment when it comes to personal tax. We're in the highest tax environment since 1949 and if we think about some of the changes that are coming through over the next few years we're seeing an increase to some of the brackets in dividend tax, we're seeing new brackets come in for rental income and one of the real key ways that VCTs are used as a planning tool is that they can be offset against both earned income and unearned income.

3:39So that means that any income tax bill that's derived from dividend tax, rental income, pension income can be offset using a VCT. So I think that they still play a really important part actually in planning for clients and in client portfolios and helping clients meet their goals, you know, working with their financial advisors to help make that happen. So I think it's going to be an interesting 12 months to see the impact of that and has that been seen so far have have people been putting a bit more money in at this time ahead of the changes i think we've definitely seen an increase in that and um in people putting more money in it's um the calm before the storm with vcts at the moment so i think in the next few weeks we tend to see a big increase in the run-up to tax year end which is typically what we see most most years and so i think it's going to be really interesting to see how that plays between now and the 6th of April essentially.

4:33Yeah and can I just ask were the changes were they expected or did they come as a surprise do you think for the VCT industry? To the tax relief? Yeah or both actually. So I think you know the VCA had worked through a sort of carefully coordinated campaign for more than a year to sort of make the argument for these changes for positive reasons. Ultimately, we want to provide founders with scale-up capital so they can continue and expand to make more investment in R &D and create more skilled employment. So I think there was a strong underlying logic to the arguments that were put forward. And we were delighted that the Treasury recognized those.

5:10I think when it came to income tax relief, I think we're a bit more puzzled by that move. I mean, ultimately, you know, the UK has a well-recognized funding gap for companies where they exit the sort of state-aided schemes and then they move on to non-state-aided investment. And it's been around for a long time. And there's no doubt that the new rules as they come to fit will help soften that sort of cliff edge. But of course, our ability to provide capital to companies is not just a function of the rules we operate under, but also the capital we have ourselves. And whilst it's unclear what the impact will be at this point, directionally, it clearly can only be unhelpful.

5:47When these changes were made back in 2006-7, that we referred to earlier on there was a 65 % reduction in capital invested into these in the subsequent tax year so we know direction is not helpful but of course VCTs don't exist in isolation you know they are one of a number of ways which people can save in a way that's tax efficient and so you know it's a different different picture more broadly yeah I think also there was something that Rachel Reeves said actually as part of that announcement when she was talking about VCTs which is that these high growth small businesses, which VCTs are supporting through the nature of, you know, the types of companies that VCTs can invest into, she mentioned that half of all brand new jobs created in the economy come from these types of companies.

6:30They play such a vital part in helping with job creation in our economy. And so I really hope that that does continue as well. Yeah. And do you think VCTs are taken seriously enough by the government? I think the scheme is fantastic success of course I would say that but perhaps I can back that up with some facts so there are more than 106 ,000 people employed in the UK by VSTU-backed companies the scheme has been going for 30 years and the companies that are currently backed deliver more than 22 billion of revenue of which 5.5 billion is from exports which we know is important to the government and they invest more than 274 million pounds a year into research and development so across the 30 years the businesses support thousands of companies.

7:14I believe it's 1 ,600 or more in the last 10 years alone. So it's an important scheme. It's a scheme that not just provides capital, but also non-financial support to founders as well. And it's just worth bearing in mind that as companies make their way through their life cycle, they migrate from SAS to EIS and then on to VCTs. And VCTs are really the first time that founders come into contact with institutional investment. And that's important because there's learnings to be had there before they go on to take capital from bigger non-state sources. So there's a lot of support more broadly provided around how to set up governance controls, boards, what to expect from investors, etc.

7:50I think that's sort of value which is hard to quantify, but is also important in helping companies get themselves ready for a successful future. I think also if we just go back to 1995 when VCTs first came in, what was the reason for them? What was the purpose behind it? And it was really to support and find capital for these types of businesses, which had been really difficult to do. So, you know, when this was set up in 1995, it was so that private investors would be able to access these types of businesses and provide them the support. And I think just echoing what you said here, Oliver, is that if we look at that, the number, there's been loads of successful companies that have come from being backed by VCTs.

8:28And I think it's something we should be really proud of. Yeah. Yeah, I think growth economy, growth companies will always require capital. I mean, that's obviously the case and founders and their boards will go and search for it. we think it's really important we try and provide that capital within the UK growth ecosystem. If they don't, or if we don't, then of course they'll look for money from elsewhere, and that might include overseas investors. And when you sort of get that migration of capital from the UK to overseas, then that can have longer-term impacts in terms of the bleed of the value transfer from the UK to overseas, the bleed of talent and intellectual property ownership ceded to overseas investors as well.

9:06So I think we all would love to see the UK incubate and scale really large successful companies and we do maybe not to the extent we could but one way to try and improve our chances of creating you know huge future successes for the uk is to make sure that we keep ownership within the uk and we do that by funding them for within the uk and from uk shareholders and you think vcts are a good a good way to do that i think the vct scheme is fantastic i mean it's been around a long time it's been through many iterations of legislation it's extremely focused and effective right now and and that's for a number of reasons firstly it brings into reach for many people and asset classes otherwise beyond their means.

9:45Private equity and venture capital is normally for high net worth or high net worth investors. VCTs is a scheme that's set around a collective investment where many shareholders can support a company over time. But meanwhile, the one common shareholder, the VCTs, always that constant presence on the company's shareholder register. But people can come in and out of the scheme as their personal circumstances dictate. the scheme is obviously as you know these funds are underlisted they're overseen by boards they're such an independent audit and there's a lot of transparency there so i think it brings to the mass market an asset class otherwise much more difficult for people to reach and and you can see that in the way that investor unit sizes are relatively small you know vct investors often have 20 000 pounds maybe made across a number of investments over several years um and that's sort different from other asset classes or even for that matter from the SES and EIS investments around.

10:35They're different kind of shareholders, I think. And VCT's been growing in popularity as well. You know, if you look at VCT fundraising over the last 10 years, it's changed significantly. And I think for a lot of clients as well, both from an asset class perspective, but also a planning perspective, really see this as part of their annual planning. So I have a lot of advisors that say to me that their clients will think about their ISA, their pension, and also their VCT at the same time and so we've seen a real change actually over the last 10 years both in terms of how people have adopted VCTs into part of their planning historically it was a very tax year end focused activity that's changed we've got people that think about it on the 6th of April now which you know was sort of unheard of 15 years ago and so I think that the maturity of the VC market has really changed as well over that period and has the demographic of investors changed as well alongside that?

11:28Probably not significantly actually I think you know for VCTs we see people use VCTs in quite a wide range of circumstances so you know as I said to you I think it's it's really important to remember with VCTs that it's against the upfront income tax relief can be used against earned income and unearned income as well so the planning opportunities there are quite broad whether that's against um to use it as a planning tool against salaried income but also if there's pension income rental income you know rental income especially is quite popular because um difficult to do other types of planning with that um pension income you know there's lots of different ways that that people can use that and where i've probably seen the narrative change a little bit from a planning perspective over the past few years is yes the upfront income tax relief is very important but a lot of clients at the moment are thinking about where they can get tax-free income from um because there's been huge changes if you think about the last you know the last five years we've seen cgt allowances slashed and slashed again dividend allowances slashed and slashed again and what we're seeing moving forward is some of the dividend brackets um increasing as well and so that idea that you can get tax-free income from a vct i think is quite a powerful a powerful message um and it's something that is being talked about more and considered more as part of that planning tool for clients yeah and have the kind of plan changes to inheritance tax have they kind of fed into that as well yeah I think there's um so just to sort of um I think to elaborate on that I think that there's obviously from April 2027 the unspent pension pots are coming into scope for inheritance tax and that was announced in the autumn 24 budget now which feels like a very long time ago but um actually wasn't that long ago at all um and so i think at the moment there's a lot of advisors thinking about and investors are thinking about you know i have built up these pension pots for years and years and years um and you know past that was that it was on the premise that there would be no inheritance tax to pay on the pensions and that's obviously changing um come april 2027 so there are some advisors that are thinking about along with their clients you know extracting money from the pension paying the income tax on it but using a VCT to offset that and we've seen that being used over time anyway but you know I think some clients are talking about slightly larger lump sums that they want to withdraw from their pensions.

13:58Having said that I think that there's a few schools of thought when it comes to the pension because obviously that hasn't come in just yet it's not coming in until April 2027 but there is a lot of thought there's a lot of conversation around pensions I think it's going to have a significant impact on how financial advisors work I think the fact that for example the personal representatives are responsible for the administration of the pension is going to have such a knock-on effect with financial advisors because it's very complicated and so they're going to need to get help from somewhere so I think it's going to be it's going to be a really big big change and I think inheritance tax has been such a big conversation for the last 18 months now I can only see that ramping up as we head into April 2027 when pensions come into scope it's a really big topic but I think tax is a really big topic generally at the moment that's what we're seeing yeah I think it's important to to recognize that managers have to convince investors to invest into their funds.

15:03So that has a number of indirect consequences, one of which is that the state aid, we're all taxpayers, we all want the Treasury to invest its capital wisely where it gets the best return on investment. And I think here the VCs have a particular advantage. It's a fundamentally meritocratic scheme, as in good managers will convince shareholders to invest in them. And only if they invest will the taxpayer fund the scheme to the tune they do. And of course, to attract investment, you've got to deliver performance. And you only deliver performance if you back good companies. Good companies create jobs, they create innovation, they create intellectual property, and ultimately they create tax which goes back into the exchequer.

15:45So ultimately, I think we're all focused on trying to deliver a good outcome for our shareholders, which implies by extension, therefore we give a good outcome to the treasury for the money that they invest into the scheme. Yeah. Where would you like to see the scheme go, I guess, over the next 10 years, if there were any more changes that they could bring in? I mean, I think we all accept that Treasury is in a difficult position at the moment, and they're looking for ways to try and keep costs down. We think probably there are better ways in which the scheme can be adapted to deliver the policy goal in reducing costs, but to do so in a way that actually doesn't inhibit or reduce the amount of capital available to the growth ecosystem.

16:26I mean, the first point to note is that, you know, I mean, obviously I'm talking from this position as a, you know, from self-revision as a VST manager. What matters from a corporate point of view, from a UK PLC point of view, is the amount of capital available to companies. Now, that might be through VSTs, it might be through EIS. And I think here is potentially, you know, there may be some muddled thinking. because in our opinion and based on conversations we've had with advisors, but also actually with a survey that Wealth Club did shortly after the budget, we don't think there's huge overlap between VST investors and EIS investors.

16:57And Diana touched on this point. I think they are looking for different themes from the schemes. And in the Wealth Club survey, they found that only 13 % of those who surveyed would divert their investment away from VSTs to EIS. So I think the whole scheme will get smaller. And as a result, that's a negative for companies. So we might be able to provide more capital to more companies for longer, but only if we ourselves have the capital that's available for investment. So how could the Treasury, you know, we would obviously like them to revisit this policy announcement and what can we offer up as perhaps a better alternative?

17:28And I think for us, the focus is on what happens when we exit investments, because there is not policy arbitrage that exists right now. When we sell a company, we have 12 months to reinvest that capital. Now, when you raise new money from shareholders, you have three years to invest that money. So logically, if you have big exits, from a risk management point of view, you're better off returning that capital to shareholders through special dividends than bringing it back in to the VCT through another offer. If the Treasury were to give companies or VCTs three years to reinvest the proceeds, then suddenly there's not that arbitrage between new capital from exits and new capital from shareholders.

18:07And that means there'll be less money paid out through dividends, special dividends, and there'll be less, therefore, the need to raise less money from new issuance and therefore bring in that 30 % tax relief again. And a very good example is if you look at the Unicorn AVCT, they've just had a phenomenal exit from Hasgrove. It's been a huge, huge successful investment over 20 years, again, emphasizing how VCTs make long-term investments. They are providing patient capital. But when you exit almost half of your NAV through a single company, then you're going to have to return that money because you've got 12 months otherwise to be invested a substantial sum.

18:40And that presents challenges to the manager, to the board and to shareholders. So the logical thing to do is to pay it back and then bring that money into an offer. And we think this is a more cost-effective way of doing that. Yeah, I think, yeah, that's super interesting. I wonder if the government will be listening to this podcast. I think the final thing, just a final note to end on, is what would your message be to advisors? What should they be telling their clients now ahead of the changes coming in in April? I think that's a really good question actually I think for me it's just thinking about planning just going back to planning really I think that there are a lot of changes coming through and actually one of the things that I looked at was a timeline of all the tax changes that are coming through on a personal tax basis and there is a lot coming down that pipe and just thinking about actually you know the financial plans that might have been put in place a couple years ago things have changed significantly since then so it's thinking about actually is you know what do those plans look like moving forward but also i think that there is a role that these tax efficient investments could play for the right clients and for certain clients but it goes back to what the client goal is what they're looking to achieve and what they're hoping to get out of it as well i think you know it's hard for me to give advice on on individual client positions but i think the message i'd i'd want people to to take away is that the uk's innovation economy is really robust and strong.

20:07The UK economy might itself be a little bit weak at the moment, but if you step away from the financial markets and you go and meet companies, our founders, our CEOs, and our business leaders are all as determined as ever to create successful companies with strong intellectual property. So I think, and we see that in our portfolio, the three-year compound down of growth in revenues is 19.8%. So I think, and I'm sure that's not just typical of us. I think a lot of ECT has got a lot of good things going on underneath the bonnet. And I think that people should continue think about the investment opportunity and you know they have to just make their own decision about what tax implications are for the change in income tax relief but I think my message is the the opportunity the value creation opportunity is as strong as ever and it will be better still if we can provide more capital to those companies.

20:52I think that's a really good point though isn't it sort of finishing on that is that I think there's often perception that VCTs are all the same and actually that's not the case at all you have you know a VCT like ours which invests into early stage b2b companies your vct is doing something different again and there's lots of vcts out there with different focuses different things that they invest into and so i always say to people if you're looking at vcts just get under the bonnet and look at what the actual underlying investment is often people will find that there's certain companies that might resonate with them or certain sectors but there really is vcts i think are doing some really exciting things and there's some really interesting growth stories out there that have come from VCTs.

21:34We're all disappointed by the news on the income tax relief, and obviously we hope it might be reversed in time. But a step back, there's been a successful campaign to change the rules that govern how we invest, and those changes have been made, and they are good changes. That's great for VCTs, for the way that we deploy capital. We will, as I say, we'll be able to back more companies for longer, and hopefully capture more value opportunity. And that's great for shareholders as well. Yeah. Well, thank you very much, Diana and Oliver. I think you've certainly helped me make a bit more sense of it.

22:08And hopefully for you, the listener as well, this has been the FT Advisor podcast. We'll be back next week with another interesting topic. Thank you.

22:27Thank you.