Reeves’ Budget dismays investors with tax-relief cut

Alex Davies, chief executive of investment platform Wealth Club, said that in 2006-07, when the advance tax break was reduced from 40% to 30%, the amount raised by anti-corruption programs fell by 65% ​​and it took more than a decade to recover to previous levels. He said the cut announced this year had sparked a pre-relief “Black Friday rush” for senior VCT managers, with his platform seeing a 538% rise in orders the day after the Budget.

Others were less polite.

Peter Hicks, a research analyst at investment firm Chelsea Financial Services, told Trustnet, an investment research and data platform, that the move “makes absolutely no sense”, adding: “Rachel Reeves is performing an impressive mental exercise in describing this Budget as ‘pro-growth’ while simultaneously draining the lifeblood of companies that drive growth.”

Callum Pickering, chief economist at investment bank Bill Hunt, described it as a “stupid change”.

The Treasury’s justification is that it plans to raise the VCT and EIS limits to allow investors to follow the growth of companies beyond the start-up stage and to stimulate funds to support high-growth companies.

What this means in practical terms is that companies that qualify for EIS or inclusion in a credit and credit testing portfolio will be able to raise more money than they could previously, which is significantly the case in some cases, especially those that the Treasury calls “knowledge-intensive companies”.

Previously, VCT investee companies could receive a maximum annual investment of £5 million and a lifetime maximum of £12 million (£12 million and £20 million for knowledge-intensive companies), but these limits will now rise to £10 million and £24 million (£20 million and £40 million for knowledge-intensive companies).

There will also be an amendment to the qualifying rules that will allow more established companies to be listed.

In fairness to the Treasury, the industry campaigned before the Budget to increase the limits, arguing they had been eroded by inflation since they were last changed in 2016.

For a cash-strapped government, cutting the tax break on tax transfers and credits could easily save money. The Treasury expects to be £125 million better off in 2027-28 as a result of this measure and by £95 million in each of the subsequent two tax years – more than offsetting the cost of extending the scheme’s limits.

What is worrying is that voluntary and probationary testing already appears to be less popular. According to the latest Treasury statistics, VCTs issued £873m worth of shares in the 2023-24 tax year, down 17% on the previous year, while VCTs investors claimed tax relief on investments worth £810m, down 19% on the previous year. The number of individual investors claiming tax relief fell by 9% to 24,085.

The Treasury will claim that by increasing annual and lifetime investment limits, it is paving the way for more capital to be directed toward startups and startups. The danger here is that cutting upfront tax breaks deters the very investors who would have provided this capital.

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– Holly Eliatt