Overall there were no Budget changes to VCT, EIS, BPRA or IHT that impact offerings but there was a shot across the bows of the VCT industry in the area of enhanced buybacks.
VCT Enhanced Buybacks: A large number of VCTs have launched enhanced buyback offers. These allow investors who are interested in committing to being invested for a further five years to effectively swap out their current holding for new shares on which they can claim the up front 30 per cent income tax relief. The key point is that this is not an exit opportunity for investors as all the proceeds must be reinvested in new shares.
This approach should in our view be considered by all investors who:
1 Have held the shares for at least five years (to avoid any up front tax relief being withdrawn)
2. Can commit the funds for another five years to an investment in the VCT (as new shares carry a five year minimum holding period to avoid the up front tax relief being withdrawn)
3. Have not fully utilised their annual £200,000 VCT allowance for the tax year in which they are asking for the new shares to be issued
4. Have not deferred Capital Gains Tax when purchasing the original shares as CGT can no longer be deferred by investing in VCT shares (CGT could be deferred for VCT shares purchased new up to 5 April 2004)
Up to now it appeared that HMRC had no objection to these offers but we have warned in the past that it may be that this approach changes in the future as it could be viewed as costing the Exchequer more tax relief but without any further funds being committed to the VCT sector.
The Budget contained the following: “.. following a number of representations from investors, the Government is concerned that VCTs offering enhanced buy-backs are not operating within the spirit of the legislation. The Government will continue to monitor particular aspects of the venture capital schemes to ensure that they remain well-focused and supportive of businesses needs”.
“Representations from investors” is an intriguing phrase? Why would investors complain about this practice?
Anyway, we consider this as a shot across the bows of the industry and we would not be surprised to see some form of restriction coming into play in the future. However this does not affect the current offers.
The other change affected the Seed Enterprise Investment Scheme, launched at Budget 2012, which offers 50 per cent income tax relief on investments made into small, early-stage companies. The Government has decided to provide a limited extension of the capital gains tax holiday to continue to encourage investors to take up the new scheme. Any investors making capital gains in 2013-14 will receive a 50 per cent capital gains tax relief when they reinvest those gains into seed companies in either 2013-14 or 2014-15. In our view this will not do much to improve interest in this tax relief.
Martin Churchill is editor of Tax Efficient Review