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Govt proposes VCT share buyback reform

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The Treasury has published a consultation paper proposing limits on enhanced share buybacks used by VCTs.

Concerns that certain share buyback schemes do not represent good value for money to the taxpayer were first raised by the Government during the 2013 Budget.

The consultation paper published yesterday reiterates a particular issue with repurchasing processes and enhanced share buy-backs, which provide incentives for investors to re-invest in the same VCT over a short time period.

It says: “These practices are increasingly leading to investor expectations that they will always be able to sell their shares after a period of five years and to ‘refresh’ their tax relief at that point by immediately re-investing in the same VCT.

“In some cases, the process does not appear to result in the investor providing any new money to the VCT.”

Several options for changes to share buybacks are outlined in the consultation, designed to inhibit short-termism by stopping investors from re-investing purely for additional tax relief.

The government’s main proposal involves placing restrictions on the investor, including a time limit on when they can subscribe for shares within a certain period of a sale of shares in the VCT.

Another possible restriction on the investor would occur where the re-purchasing of shares involves a condition that the investor re-invests in the same VCT or another from the same fund group, the paper says.

It adds: “This approach is likely to be the most straightforward means of ensuring that upfront income tax relief is given only for genuine new investment in a VCT, and not for funds which an investor is effectively recycling in order to obtain more tax relief.”

The consultation also covers other alternative options and invites comment on each of the proposals. It is expected that any reform will require a change in VCT legislation, taking effect from April 2014.

AIC director general Ian Sayers says: “We are keen to help the government deliver an effective solution to its concerns over the use of enhanced share buybacks. 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 buybacks which help maintain liquidity in the sector.”

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