InvestmentsNov 10 2015

Treasury rethinking ban on capital replacement

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Treasury rethinking ban on capital replacement

The Treasury has confirmed its commitment to replacement capital for venture capital trusts.

David Gauke, financial secretary to the Treasury, said: “I’ve made a commitment to introduce greater flexibility for replacement capital in the schemes.

“While this is subject to state aid approval, my officials are already engaging with the European Commission to deliver this.

“Following the Summer Budget announcements, many of you made representations to me and my officials about the issue of replacement capital, which is the purchase of secondary shares when accompanied by a significant new investment into a business.”

Speaking at an Association of Investment Companies conference on VCTs in London on 10 November, he added: “While the primary purpose of these schemes is to provide funding for small companies, many of you have put forward the argument that as part of new investment some reorganisation of capital may be needed. This can involve the need to purchase the shares of existing shareholders.

“I’ve listened to your concerns.”

The post-general election Summer Budget in July introduced additional new rules for VCTs.

It will no longer be permitted for VCT deals to involve an element of replacement capital, for example to buy out an employee shareholder or allow management to realise some capital.

The rule means management buy-out transactions will no longer be possible.

Adviser view

Kavita Patel, partner and head of investment funds for Buckinghamshire-based Shakespeare Martineau, said: “Certainly, enhanced due diligence will be required, together with a clear understanding of what the actual ‘trade’ being funded is. While the new provisions initially look complex there are some relatively simple steps one can take to ensure compliance.”