Lowes Financial Management managing director Ian Lowes says venture capital trusts are using enhanced share buyback schemes to encourage investors to stay in badly performing investments.

Enhanced share buybacks allow investors to sell their VCT holding back to the provider at the end of their five-year investment term, often for the net asset value, less about 3 per cent. Investors can then buy an identical holding back at the net asset value. They lose some of the value of their investment but requalify for 30 per cent income tax relief on the new shares.

Lowes says: “I am a supporter of tax efficiency but this is manipulation of legislation that is mean to encourage new investment in smaller companies.

“Often, the scheme simply rewards the managers for what has in many cases been dire performance while compensating the client with more tax relief to tie them in for another five years.”

VCT and EIS provider Downing offers enhanced share buyback schemes. Partner Tony McGing says: “Enhanced share buybacks are a good service for investors as it gives them an extra slug of tax relief for a small additional investment.

“Enhanced share buybacks are offered on highly performing VCTs as well as poorly performing VCTs.”