Dec 172013

New rules are being introduced to restrict upfront relief, where an investor sells his shares back to the VCT and uses the proceeds to subscribe for another shareholding. In this way, one can have a series of share subscriptions, each one giving rise to tax relief, but with no fresh money actually going into the system and finding its way towards the high growth companies that the VCT scheme is intended to benefit.

Rules to restrict upfront relief in a share buyback situation were first mooted in the Consultation Paper earlier this summer. We now have some draft legislation, so it is now possible to explore in more detail, just how these new rules will apply.

Operative date

The new rules for share buybacks will take effect for shares issued on or after 6 April 20141.

Upfront relief limited when there is a linked sale

The draft legislation introduces a new concept, the concept of a linked sale. This is where the investor sells his VCT shares, and the sale is linked to another share subscription. In these circumstances, upfront relief will be denied to the extent that the proceeds from the share sale are used to fund the new subscription2.

The restriction will apply where the sale proceeds are reinvested in the same VCT3 – it is clear that the money is simply going round in a circle, and isn’t going to add anything to the underlying investment portfolio.

The rules will also cover the case where there has been a restructuring or merger of a VCT, and the sale and reinvestment involves both the merged VCT and the original4. This will apply in two ways:

  • Either the old shares are held in the original VCT and the proceeds reinvested in the new VCT into which the original subsequently merges or restructures; or
  • An investor can subscribe for shares in the original and the money is subsequently returned by selling the shares held in the new VCT.

This is the first scenario:

VCT share buybacks - original VCT buys back

And this is the second:

VCT share buybacks - merged VCT buys back

Although they are distinct, there is still some measure of identity between the two funds, and so it is arguable that the sale proceeds aren’t really adding anything new to the underlying investment portfolio.

But these restrictions will not affect the case where the new VCT is in fact totally distinct from the old one. In particular, the two VCTs can even be from the same fund management stable, provided that one does not subsequently merge or restructure into the other5.

So when is a share sale linked to a share subscription? There are two cases6:

  • Where the two events are interdependent – so either:
  • The purchase of the shares that the investor is selling is conditional on the latter subscribing for a new share issue; or
  • The subscription for new shares is conditional on the sale of the investor’s existing shares (which will release the necessary funds for the share subscription).
  • When the two events are within 6 months of each other, they are automatically linked – there is no need for any interdependence between them.

Note these rules do not explicitly mention that there needs to be a share buyback. For example, an investor is caught if he sells his shares on the open market, and within 6 months, subscribes for new shares in the same VCT. We have already seen that within this 6 month period, there doesn’t actually have to be a “real” link between the sale and the reinvestment. In a stock market transaction, the buyer of the old shares is likely to have no concern or interest in what the seller intends to do with the sale proceeds.

However, outside this 6 month period, the two events must be interdependent to fall within the restriction. In this case, there has to be a close nexus between the buyer of one set of VCT shares and the VCT in which the sale proceeds are to be invested. In these circumstances it is more likely that the buyer involved in the share sale will be the same, or a merged VCT, and a buyback is an obvious way in which this can be achieved.

Dividend reinvestment

The restrictions will not apply where the subscription for the new shares has been funded from VCT dividends. This is usually the case where there is a dividend reinvestment plan, or DRIP in place. In these circumstances, the upfront tax relief won’t be clawed back if there is a subsequent share sale7.

This is just the starting point

It doesn’t seem to be over.

HMRC is also concerned with the practice of using share premium accounts to return capital tax free to investors8. This is a particular issue where upfront relief has been granted and the return of capital takes place before the end of the lock-in period – the investor is effectively getting his money back early without taking on the full risk.

The following remedies have been suggested9:

  • Loss of VCT status if the company returns any capital before at least 70% of the funds raised have been invested in qualifying holdings;
  • Treating capital distributions out of share premium accounts as a taxable receipt in the hands of the investors; and
  • Limiting the level of capital distributions that VCTs can make out of share premium accounts.

We must wait for further news on this front – there will be a series of technical workshops which will be run in January 2014, with a view to introducing legislation in time for the Budget. Anyone who wishes to attend these workshops should contact either Sarah Adams at or Kathryn Robertson at

The link to the Government Response to the Consultation can be found here.


  1. FB 2014 Draft Legislation Schedule 1, paragraph 1(2).
  2. New ITA 2007 ss 264A(2), (3).
  3. New ITA 2007 s 264A(5)(a).
  4. New ITA 2007 ss 264A(5)(b), (7).
  5. In the original Consultation Paper, HMRC was proposing to include VCTs within the same fund management group. This proposition has been dropped – see the Government Response to the Consultation Paper at paragraph 2.16.
  6. New ITA 2007 ss 264A(4), (6).
  7. New ITA 2007 s 264A(8).
  8. Government Response to the Consultation Paper Chapter 3.
  9. Government Response to the Consultation Paper at paragraph 3.9.
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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