InvestmentsDec 5 2013

Gov’t to end VCT ‘enhanced buy-backs’ with relief removal

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The government has confirmed that it is removing tax reliefs relating to so-called ‘enhanced buy-backs’ offered by venture capital trust managers, following an investigation by the Treasury.

Enhanced buy-backs allow investors who have their VCT shares for more than the five-year qualifying period to sell their shares back to the manager and immediately repurchase shares for another five years, thereby becoming entitled to another round of 30 percent income tax relief.

At the Budget in March the Treasury announced it would be looking into enhanced buy-backs, stating it has concerns that managers offering the mechanisms are not operating within the spirit of the legislation.

In documents published alongside today’s (5 December) Autumn Statement, the government has confirmed that investments which are conditionally linked in any way to a buy-back, or that have been made within six months of a disposal of shares in the same VCT, will not qualify for new tax relief.

In the 130-page Autumn statement, the government revealed it will also consult further on potential changes to VCT rules to address the use of ‘converted share premium accounts’ to return capital to investors where that return does not reflect profits on the VCT’s investments.

To continue to facilitate use of VCTs by different types of retail investors, the government will change the VCT rules in the Finance Bill 2014 so that investors can subscribe for VCT shares via nominees.

The government’s decision came after we revealed earlier this year that the rules were set to be changed.

Back in September Guy Myles, co-founder and managing director of Octopus, told us enhanced buy-back rules would be tinkered with by the government, but he insisted changes should not be negative for VCT holders.

Firms and trade bodies had offered a cautious welcome to government plans to crack down on the schemes, but a number of commentators cautioned the rules must not affect traditional buy-backs by managers that provide much-needed liquidity by offering an exit for investors.

Ian Sayers, Director General, AIC said: “VCTs play a vital role in supporting the growth of UK SMEs, particularly those struggling to secure bank lending. However, it is right that the Government continues to review the operation of the scheme to ensure it is functioning correctly and delivering its public policy objectives.

“That said we also wish to ensure that there is as little disruption to the ongoing work of VCTs as possible, in particular the use of “traditional” share buy-backs which help maintain liquidity in the sector.”