UK Eases Qualifying Rules For Low-Tax Venture Capital Trusts

by Justin Gorringe, Tax-News.com, London

25 October 2002

The UK's Inland Revenue announced new rules yesterday for Venture Capital Trusts which will make it easier to restructure holdings of investments without losing crucial tax reliefs.

The VCT scheme was introduced in 1995. VCTs are companies listed on the Stock Exchange which specialise in investing in small higher-risk unquoted trading companies. VCT investors benefit from income tax relief (at 20 per cent) on investments up to £100,000 in any tax year and on dividends thereon; and there are a number of highly attractive capital gains tax benefits.

VCTs have been very successful, raising several billion pounds for investment in smaller companies, although since the dot-com crash they have been less appealing to investors.

The tax reliefs require that the VCT should invest at least 70% of its capital in small, higher risk trading companies and that at least 30% of the VCT's
investment in these qualifying holdings must be comprised of ordinary shares.

The problem being addressed by the new rules is that when a VCT exchanges one of its holdings for shares in (for instance) an acquiring company, then the holding ceases to qualify under the 70% and 30% conditions.

Under the new rules, if the reason that the investment in the new shares or securities would not count towards the 70 or 30 per cent conditions is because it was received in exchange for other shares or securities that were qualifying investments, rather than being subscribed for in cash, the new regulations will allow the investment to qualify.

In all other cases VCTs will now have a period of up to 3 years to dispose of the new investment (two years where the investments are not in unquoted companies), during which period the investment will be treated as though it counted towards the 70 and 30 per cent conditions.

The new regulations have application to re-structuring that took place on or after 21st March 2000. Their official title is: The Venture Capital Trust (Exchange of Shares and Securities) Regulations 2002 (SI 2002,No.2661) made under the powers conferred by section 842AA (5AD) and paragraph 11B, Schedule 28B of ICTA 88. But you knew that, of course.

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