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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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VCT: VCT mergers: preservation of reliefs etc

SI2004/2199 Regulation 13

Where there is an approved merger of two VCTs regulation 13 overrides some of the rules that would otherwise apply to the issue and disposal of their shares and investments.

1. Preservation of ‘front end’ income tax relief and deferred chargeable gains

Regulation 13(2) and 13(3) provide that:

  • where new shares have been issued to effect a merger either in direct exchange for old shares (examples 1, 3 and 5 of VCM57020) or in consideration of a business transfer (examples 2 & 4 of VCM57020).
  • for the purposes of ITA07/Part 6 Chapter 2 (relief from income tax) and TCGA92/SCH5C (deferred charge on reinvestment):

    • any share for share exchange or share for business transfer will be treated as not involving a disposal of the old shares, or as a chargeable event for the purposes of TCGA92/SCH5C,
    • anything carried out (or not carried out) in relation to the old shares will be treated as having been carried out (or, as the case may be, not carried out) in relation to the corresponding new shares (this includes the granting of income tax relief under ITA07/Part 6 Chapter 2 and CGT deferral relief under TCGA92/SCH5C/PARA2),
    • references in that legislation to the company in which the old shares were held shall be read as references to the successor company.

Here, the ‘new shares’ means the shares issued to effect the merger and the ‘old shares’ means either the shares for which the new shares were exchanged (examples 1, 3 and 5 of VCM57020) or, in the case of a business transfer, the corresponding shares in respect of which the new shares were issued.

So an approved merger of two or more VCTs will not, of itself, result in the loss of any investor’s ‘front end’ income tax relief or the revival (or crystallisation) of any chargeable gains deferred by reference to the earlier investment.

2. Preservation of capital gains exemption: successor company not VCT at time of merger

A successor company involved in a VCT merger may not necessarily have approved VCT status at the time of the merger. Without other provision, this would deny investors exemption in respect of chargeable gains under TCGA92/S151A and S151B on their disposal of any of the new shares.

Regulation 13 therefore provides that for that purposes of TCGA92/S151A and S151B where a successor company:

  • did not have approved VCT status when shares were issued to effect the merger,
  • but is a VCT the time those shares are disposed of,

it will be treated as having had VCT status at the time of the merger.

3. Preservation of status of qualifying holdings

Regulation 13 ensures that an approved merger of two or more VCTs does not affect the status of a merging VCTs qualifying holdings. It applies where any of the requirements of ITA07/Part 6 Chapter 4 (apart from ITA07/S296 and S298 - see below) were satisfied (or were deemed to have been satisfied) to any extent or for any period in relation to an investment held by a merging company. Its effect is that those requirements will be treated as having been met to the same extent, and for the same period, when held by the successor company, and as if the successor company and the other merging company were the same company. This applies both to an actual holding by a successor company (examples 2 and 4) and to the situation where the holding is deemed to be vested in the successor company under regulation 12 in the context of examples 1, 3 and 5. Further, if there is a subsequent actual transfer up of the portfolio to the successor company in examples 1, 3 and 5, then regulation 13 can again apply to treat the ITA07/Part 6 Chapter 4 provisions as having been satisfied in a similar way.

4. Relaxation of requirements relating to subsidiaries

Regulation 13 relaxes the normal rule that prevents a company in which a VCT has invested from being under the control of another company, or of another company and any other person or persons connected with that company (ITA07/S296, VCM55190).

It provides that for the purposes of ITA07/S296:

  • the period during which an approved merger takes place is disregarded, and
  • if, as a result of the merger, the requirements of S296 are not met immediately after the merger, they are nevertheless treated as met for a period of one-year following the conclusion of the merger.