VCT: investor CG disposal relief: acquisitions over permitted maximum
The VCT shares on which the taxpayer is entitled to CGT relief on disposals are limited to acquisitions up to the permitted maximum in any tax year. This maximum is £100,000 for years up to and including 2003-04 and £200,000 for 2004-05 onwards. The rules for determining whether shares are acquired in excess of the permitted maximum are in ITTOIA05/Part 6 Chapter 5. The basic rules are:
- the annual limit applies to all the taxpayer’s acquisitions in VCTs in the tax year concerned,
- shares acquired earlier in the tax year count towards the permitted maximum first,
- shares in different VCTs or different classes of ordinary share in the same VCT acquired on the same day are identified on a pro rata basis.
In the tax year 2005-06 an investor acquires the following ordinary shares in VCTs:
- 6 May 2005 buys 50,000 shares in A plc at a cost of £70,000.
- 10 July 2005 subscribes for 120,000 shares in B plc at a cost of £120,000.
- 9 September 2005 buys 40,000 shares in C plc at a cost of £50,000.
The 50,000 A plc shares and the 120,000 B plc shares qualify for CGT relief on disposals. The acquisition of the 40,000 C plc shares takes the taxpayer above the £200,000 permitted maximum for the year.
As the taxpayer has already acquired shares up to a total of £190,000 (£70,000 + £120,000) in the year, only the shares identified with the first £10,000 of the final £50,000 will qualify for exemption. The calculation is (£10,000/ £50,000) x 40,000 shares = 8,000 shares.
Therefore 8,000 C plc shares will be exempt and 32,000 C plc shares will not qualify for exemption.
The rules for identifying shares acquired in excess of the permitted maximum are mandatory. A taxpayer who acquires shares worth more than the permitted maximum in any tax year cannot choose which shares are treated as acquired in excess of the permitted maximum. So in the example above the taxpayer could not claim that £40,000 worth of the A plc shares were acquired in excess of the permitted maximum for the tax year 2004-05.