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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Venture Capital Trusts

Non-qualifying holdings

All the funds within a VCT are tax-advantaged and must be used in line with the new rules. With certain exceptions explained below, all investments made on or after 18 November 2015 by a VCT must meet the conditions in ITA07/S274:

  • The investment limits condition
  • The permitted maximum age condition
  • The no business acquisition condition.

However VCTs are not required to have all their funds invested in qualifying holdings at any given time, because they need some headroom to allow for liquidity management purposes, for example when carrying our due diligence on a proposed investment.

Non–qualifying holdings allowed for liquidity management purposes

ITA07/S274(3A) specifies three types of investments a VCT may make where the investment limits permitted maximum age and no business acquisition conditions do not apply. These investments are liquid investments that can be realised easily:

  • Shares or units in an AIF (alternative investment fund) or in a UCITS (undertakings for the collective investment in transferable securities) which may be repurchased or redeemed by the investor on no more than 7 days’ notice
  • Ordinary shares or securities in a company which are acquired on a regulated market.

An AIF has the meaning given by regulation 3 of the Alternative Investment Fund Managers Regulations 2013.

A UCITS has the meaning given by section 363A(4)of the Taxation (International and Other Provisions) Act 2010.

CTM48115 provides more information about AIFs and UCITS.

A regulated market is defined in section ITA/S274(4). VCM54040 provides more guidance on regulated markets.

Existing non-qualifying holdings acquired before 18 November 2015 are not affected by the new rules.

VCT status

As explained at VCM 54000+ a VCT must meet a number of conditions to be, and remain, approved as a VCT.

F(2)A 2015 extended the investments limits condition and added two further conditions, the permitted maximum age condition and the no business acquisition condition.

If a VCT invests in a company that breaches one of these three conditions it is possible for the VCT to lose its status as a VCT.

However HMRC will not normally exercise its discretion to withdraw approval from the VCT under ITA07/S281(1) provided:

  • The VCT notifies HMRC immediately it appears that a condition will be breached and
  • The VCT can demonstrate that it has resisted any proposals to breach the conditions and that the actions that led or will lead to breaching the conditions were or are outside the VCT’s control.

Each breach or potential breach will be decided on a case by case basis.