The potential appeal of the UK’s venture capital trusts has been significantly boosted after the European Commission loosened the constraints on how much tax relief these vehicles can enjoy, according to the Association of Investment Companies.

The change will enable the UK government to increase the size of companies which can receive VCT funds, up from those with assets of £7 million (around $10.9 million) to £15 million; and allow firms with a headcount of 250 staff to get funds (at present, the cap is set at 50 people). Firms can receive more money, with the sum rising from £2 million to £5 million.

“The State Aid rules set stringent conditions on the level of Government help which can be provided to SMEs. Today’s approval makes VCTs one of the most generous incentive schemes in Europe,” Ian Sayers, director general at the AIC, said.

VCTs are companies listed on the London Stock Exchange, which invest in other, unlisted firms. These vehicles were introduced in 1995. As explained by the UK investment advisory firm bestinvest, “VCT performance can be erratic from period to period depending on the timing of realisations and flotations”. The underlying nature of VCT assets means these can be highly illiquid.

The EC’s move comes shortly after the UK government increased the investment freedoms and tax-free limits for Enterprise Investment Schemes, structures that benefit from reliefs on income and capital gains taxes, among others. The increased relief limits have been cited as reasons for making EIS vehicles more attractive to investors such as family offices. (To view an article on this issue, click here.). Such investment sources take on new importance at a time when traditional bank finance has been squeezed since the 2008 financial crisis.

In April, the AIC published research which it said showed that companies receiving VCT investment delivered, on average, a 16 per cent year-on-year increase in employee numbers post-investment. It also said that for every £1 of upfront income tax relief investors received for investing in a VCT, £7 of new turnover is recorded by small and medium-sized firms receiving VCT funding.  The average VCT investment in each investee company is £2.3 million.