Finance Act 2013 and the Abolition of Approved Venture Capital Trusts (AVCTs)

The Finance Act 2013 brought about significant changes to the UK's venture capital landscape, most notably the abolition of Approved Venture Capital Trusts (AVCTs). AVCTs were a specific type of venture capital trust designed to encourage investment in smaller, unquoted companies. While they shared similarities with Venture Capital Trusts (VCTs), they operated under slightly different rules and offered investors distinct tax benefits.

Key Features of AVCTs (Pre-2013)

Prior to their abolishment, AVCTs offered investors several attractive tax incentives:

• Income Tax Relief: Investors could claim income tax relief on investments in AVCTs, subject to certain limits.
• Capital Gains Tax (CGT) Exemption: Any gains made on the disposal of AVCT shares were exempt from CGT.
• Dividend Income Tax Relief: Dividends received from AVCTs were often tax-free.

These tax advantages made AVCTs a popular option for individuals seeking to invest in smaller, higher-risk companies while mitigating their tax liabilities.

Reasons for Abolition

The government's rationale for abolishing AVCTs was primarily driven by a desire to simplify the venture capital trust regime. By consolidating the rules and removing the distinction between AVCTs and standard VCTs, the government aimed to reduce complexity and administrative burdens. The justification also included arguments that the tax benefits offered by AVCTs were not sufficiently targeted or effective in incentivizing investment in the desired types of companies.

Impact of the Abolition

The Finance Act 2013 effectively closed the AVCT scheme to new investments. Existing AVCTs were allowed to continue operating, but they were no longer able to attract fresh capital under the same tax-advantaged terms. This had several consequences:

• Reduced Investment Options: Investors lost a specific type of venture capital investment vehicle.
• Shift to VCTs: Some investors likely shifted their focus towards standard VCTs, which continued to offer similar, although not identical, tax benefits.
• Potential Impact on Smaller Companies: While difficult to quantify precisely, the abolition may have indirectly reduced the availability of funding for the specific types of companies that AVCTs historically targeted.

Legacy and Current Landscape

Although AVCTs are no longer active investment vehicles, their legacy remains in the history of UK venture capital. The Finance Act 2013 marked a significant shift in government policy, demonstrating a willingness to streamline investment schemes even if it meant removing established programs. Today, standard VCTs remain a crucial part of the UK's investment ecosystem, offering tax incentives to encourage investment in smaller, growing businesses.

The abolition of AVCTs serves as a reminder of the constantly evolving nature of tax legislation and the importance of staying informed about changes that may affect investment strategies.