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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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VCT: VCT mergers: 70%, 30% or 70% & 15% tests and ITA07/S274 and S275

SI2004/2199 Regulation 12; ICTA88/S842AA (2) & ITA07/Part 6 Chapter 4


The VCT approval criteria (VCM54020) require that the company achieves minimum levels of investment:

  • at least 70% by value of its investments must be in qualifying holdings of shares or securities (the ‘70% qualifying holding condition’ - see VCM54080 onwards),
  • at least 30% by value of its qualifying holdings must be in holdings of eligible shares (the ‘30% eligible shares condition’ - see VCM54140),
  • from 6 April 2011 the level at which the VCT must maintain its qualifying holdings increases from 30% to 70%. This new level will apply to investments made by a VCT with money raised on or after 6 April 2011 (see VCM54140), and
  • no holding in any single investee company that is not also a VCT may exceed 15% of the value of all its investments (the ‘15% holding limit condition’ - see VCM54070).

The transfer of investments from one VCT to another during the course of a merger would, without alternative provision, be likely to result in a successor company (VCM57020) failing to meet one or more of these conditions.

There are also requirements within ITA07/Part 6 Chapter 4 and ITA/S274 which, without specific provision, could be breached at the time of, or following the merger of two or more VCTs. Also without specific provision, a transfer of investments from a merging company that had lost VCT status to another successor company VCT would crystallise a chargeable gain or loss since the transfer would not be within TCGA92/S100 (1) and even if the merging VCT was now a subsidiary of the successor TCGA92/S171 would not apply because of the exclusion at TCGA92/S171(2)(cc).

Effect of the Regulations

Regulation 12 of SI2004/2199 provides that where there is an approved merger of two VCTs the 70% qualifying holdings condition, the 30% or 70% eligible shares condition and the 15% holding limit condition, and the requirements of ITA07/Part 6 Chapter 4 and ITA07/S274 are applied to the successor company:

  • as if the property of the merging companies were actually vested in the successor company,
  • disregarding any assets owned by the successor company that represent shares in, or securities of (or other rights against) any of the merging companies, and
  • disregarding, in the hands of the successor company, the use of any money which would in the hands of another merging company been disregarded under ITA07/S280 (VCM54170).

This ensures that where immediately before a merger two or more VCTs each pass the 70%, 30%/70% & 15% tests and meet the Chapter 4 requirements, the successor company will also meet those tests.

To protect the transferor from a chargeable gain accruing at the time assets are transferred from a merging company (that has in consequence of the merger lost VCT status) to a successor company (which has VCT status) TCGA92/S171 (2)(cc) is disapplied in relation to transfers of assets that were held by the merging company immediately before or during the merger.

Valuation of investments in the hands of the successor company is covered at VCM57080.