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The amendment probes the third element of the change to VCTs. Until the Finance Bill was introduced, investors in VCTs benefited from the full income tax relief, if they held their investments for at least three years. The Finance Bill lengthens that holding period to five years, which is one of three measures that could impact on the attractiveness of that form of investment in the VCT market and consequently the flow of funds into VCTs and therefore into small and growing businesses.
"With the 30 per cent. income tax relief rate the Chancellor has found a compromise between maintaining the current level and returning to 20 per cent., but this change together with the increase in the minimum holding period from three to five years, appreciably alters the risk-reward profile of private equity investment by personal taxpayers."
I can see the benefit for VCTs and companies that receive investment of increasing the holding period from three years to five years, which will give both the VCTs and the companies reassurance, stability and the ability to plan for the long term. However, it is difficult to strike a balance, because one might end up with a scheme that is perfect for the interests of the companies and VCTs but that is not sufficiently attractive to investors.
I seek an explanation from the Financial Secretary on why the five-year period was chosenthe next amendment proposes lengthening the holding periodbefore a VCT investor can gain the full benefit from the reduced tax relief.
I want to support amendment No. 12 and make a couple of observations from my experience about the investor base in VCTs. Increasing the holding period for an investor from three years to five years will unquestionably reduce the attractiveness of the investment to private investors. Investors in VCTs are, by definition, individuals who have reached a certain stage of maturity in their investment life. I hesitate to say that the majority of those individuals are pensioners, but
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judging by those who turn up at the annual general meeting of my VCT, the majority who take an active interest are pensioners, although that may be because they have readily available leisure time in which to attend AGMs.
The manager of the VCT group with which I am involved has analysed the average age, investment expectation and holding period of investors in VCTs. People invest in VCTs for a number of different reasons: some are interested in capital appreciation in a tax-free environment; some are interested in income in a tax-free environment; and some are interested in a combination of the two. However, the notion that they would put at risk the tax relief available on their initial subscription if they were to seek to sell their holding within five years will undoubtedly lead a number of investors to move away from VCTs. Those investors will not necessarily include larger investors, who have further opportunities for portfolio diversification and may invest primarily for the tax reliefs, but a lot of small investors want exposure to smaller companies and feel that they are doing what the Government want by helping to finance young, energetic companies run by entrepreneurial people, which contributes to the growth and revival of the British economy. Indeed, some people choose to invest in VCTs for altruistic reasons. Increasing the holding period is the most significant measure among those proposed by the Government to change the VCTs regime, and it will restrict the attractions to investors and therefore limit the Government's policy objectives.
John Healey: We propose to lengthen the shareholding period for investments in VCTs following formal and informal representations from the VCT industry, which is the direct answer to the hon. Gentleman's question about the five-year period.
Mr. Andrew Holmes, chairman of Quester Capital Management Ltd, is not untypical. He wrote to the Chancellor in January, suggesting that we reinstate the original five-year holding period, which he described as one method of
I point out to the hon. Member for Ludlow (Mr. Dunne) that that is the principal purpose of those schemes. There was an interesting reaction from the industry on the holding period. Ben Yearsley of Hargreaves Lansdown said:
"The increased holding time had been welcomed by advisers, many of whom believed that the three-year rule encouraged investors to think of VCTs as short-term investments when they really should be held for a longer time".
Unlike the application of the 70 per cent. rule, which, after April 2007, will apply to all funds, including funds raised before this financial year, the change to the holding period will apply to new funds, not to funds raised before 6 April 2006. There is broad consensus in the investment community that the change is positive: equity investments in small firms need to be longer term to provide stability for the firms in receipt of investment, and sufficient time is required to generate genuine gains
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for the investor. I hope that the House accepts those arguments and the fact that we are making the right changes in clause 91. I therefore hope that the hon. Member for Fareham will withdraw his amendment.
Mr. Hoban: In response to my hon. Friend the Member for Ludlow (Mr. Dunne), it is a relief to discover that there are similarities in the audiences who attend the AGMs of all sorts of organisations, whether they are VCTs or otherwise. It is reassuring to learn from the Financial Secretary that managers of VCTs have responded to the proposal, and have encouraged the extension of the holding period. As I explained, I understand why they sought that extension. As was said earlier, it is important that we ensure the stability of the VCT industry. On that note, I beg to ask leave to withdraw the amendment.
John Healey: As the hon. Member for Fareham (Mr. Hoban) said, the amendment probes the notion of introducing inheritance tax business property relief for shares in venture capital trusts. It aims, too, to introduce a second tranche of income tax relief for investments in VCTs on the sixth anniversary of an individual holding that investment, but neither of those proposals would benefit the VCT scheme. A second tranche of income tax relief would not encourage any additional investment in small growth companies, and it would not contribute anything to the objectives of the VCT scheme. The hon. Gentleman will accept that his amendment involves a substantial deadweight cost, as it would provide an unnecessary incentive to investors in VCTs that were performing well. More worryingly, it would create an incentive for individuals to maintain their shareholdings in poor-performing VCTs, instead of exiting the investment for solid commercial reasons at the appropriate time. The amendment would not restrict relief to new shares, but it would enable existing investors to claim additional relief without contributing further fundsa cost that the Government cannot justify.
On the inheritance tax proposal, income tax relief is the best incentive for investments in VCTs, as it is available and attractive to the widest possible pool of investorssomething that cannot be said of the inheritance tax relief proposed by the amendment.Finally, on inheritance tax, VCT shares are quoted shares listed on the main market of the London stock exchange. Quoted shares currently qualify for inheritance tax business property relief in the exceptional circumstance that the quoted company is still in family control. That is clearly not compatible with VCT schemes, so we do not accept that there is a case for an extension of business property relief to the VCT scheme. On that basis, I hope that the hon. Gentleman will withdraw his amendment but, if he does not do so, I urge my hon. Friends to vote against it.
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