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Martin Churchill: Tax-efficient briefing

A number of VCTs have launched linked tender and 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.

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 Have held the shares for at least five years (to avoid any up front tax relief being withdrawn)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an investment in the VCT (as new shares carry a five year minimum holding period to avoid the up front tax relief being withdrawn)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 April 5, 2004)

At present, it appears that HMRC has no objection to these offers but 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.

In the future, HMRC could restrict the size of offers to a percentage of issued share capital, whereas at present there is no limit.

There are two alternative ways of allowing shareholders to sell their shares back to the company at a higher price than would normally be possible through a normal buyback – a tender offer and an enhanced share buyback offer.

Under a tender offer, qualifying shareholders may apply to sell existing shares back to the company at the tender price with the sale proceeds used to subscribe for new shares.

Accordingly, there is no requirement for any subscription monies to be sent by participating qualifying shareholders to the VCT. There is no exit opportunity.

Under an enhanced share buyback, an agent of the VCT will acquire existing shares from participating qualifying shareholders. The net proceeds of the sale of the existing shares are applied to subscribe for new shares.

Accordingly, there is no requirement for any subscription monies to be sent by participating qualifying shareholders to the VCT. There is no exit opportunity.

Martin Churchill is the editor of Tax Efficient Review

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