Budget 2014: £200 million VCT relief clawback

The government reckons it can claw back up to £145 million in tax relief over the next five years from venture capital trust (VCT) providers by excluding share buybacks and premature returns of capital to VCT shareholders made via overly large dividends.

Coupled with other restrictions on investments made by VCTs, enterprise investment schemes (EIS) and seed EIS, Budget figures show the total tax relief clawed back over five years at £200 million.

Chancellor George Osborne announced the measures in his 2014 Budget, although the announcement on conditional share buybacks had already been flagged in last November's pre-Budget report.

Oliver Bedford, manager of the Hargreave Hale AIM VCTs, is not concerned that the current tax-free dividend regime will be affected by the review of the sector conducted by HM Revenues & Customs (HMRC) and the Treasury (HMT).

At the same time the review will close down one avenue through which more aggressive schemes could have used oversized dividend payments as a mechanism for prematurely returning capital to shareholders, thereby reducing their obligation to invest in small UK companies.

"HMRC/HMT have consulted widely with the industry, and listened to feedback from stakeholders," he says. "This looks to be a sensible outcome that should receive strong support from the industry."

HMRC's policy document states: "This measure will prevent VCTs from returning share capital to investors within three years of the end of the accounting period in which the VCT issued the shares. Distributions made from realised profits will not be affected by this change." It applies to shares issued from 6 April 2014. It was also confirmed that there will be a six-month period before investors who have sold shares in a VCT can buy them back and receive a further round of tax relief.

Investors attracted to higher-risk seed EIS will be cheered to learn that the government will make the SEIS permanent. This is of particular interest to investors who have a capital gains tax liability - 50% of which will continue to attract reinvestment relief when invested in SEIS qualifying companies. Investments are also free from inheritance tax after two years. The measure will be introduced in the 2014 Finance bill.

Gary Robins, partner at Chancery Investment Partners, welcomed the move to make SEIS permanent. He adds: "What investors may not realise is that this relief was originally set at 100% for tax year 2012/13 and investors can still benefit from that 100% relief if they invest in an SEIS qualifying company before 5 April."

The proscribed investments for all three tax-advantaged vehicles apply to companies already receiving subsidies in the form of renewables obligation certificates and/or the renewable heat incentive.

Budget documents also confirmed a proviso in the 2014 Finance Bill that allows investors to subscribe for VCT shares via nominees and a further consultation in the summer on allowing both EISs and VCTs to invest in convertible loans.