Claw backs and buy-backs

There was one change and one threat on the venture capital front in the 20 March Budget announcement.

For Seed Enterprise Investment Schemes (SEIS), the CGT reinvestment relief continues for 2013/14, but for only half the reinvested gain. Therefore, the maximum tax relief for SEIS investment will in theory be 64% (50% income tax + 28% x ½ CGT reinvestment relief). The Government is not expecting this to encourage much investment – it estimates the extension of the relief will cost just £5 million in lost tax revenue.

Over three times more costly for the Treasury has been the growth in enhanced buy-backs operated by many venture capital trusts (VCTs). Buy-back schemes allow investors who have held their VCT shares beyond the tax relief claw back period (currently five years) to sell and immediately repurchase their holding with minimal expenses, but with the benefit of a new round of 30% tax relief. In 2011/12 £60 million was recycled in this way. The papers accompanying the Budget said “…the Government is concerned that VCTs offering enhanced buy-backs are not operating within the spirit of the legislation”, which sounds ominously like the threat of a future attack.

There were two changes to stamp duty which will help some investors, although neither will occur before 2014/15:

  • The purchase of shares on AIM and similar markets will be made free of stamp duty, cutting buying costs by 0.5% and potentially improving market liquidity.
  • An arcane stamp duty reserve tax rule that applies to unit trusts and open-ended investment companies investing in UK equities will be abolished. In theory this will give a very small boost to investor’s returns.

The value of tax reliefs depends on your individual circumstances.  Tax laws can change.  The Financial Conduct Authority does not regulate tax advice.  The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

5th April 2013