VCT: VCT mergers: valuation of successor company's investments
SI2004/2199 Regulation 13; ITA/S274(2)
ITA07/S274(2) contains the 70% qualifying holding condition, 30% or 70% eligible shares condition and the 15% holding limit condition that a VCT must pass to achieve and maintain approval. And there is a requirement in ITA07/S289 concerning the minimum proportion (10%) of the qualifying holding in each company that must be in eligible shares. These tests all require a valuation of the company’s investments.
Regulation 13 of SI2004/2199 provides that, for the purposes of these various tests, the value of an investment in the hands of a successor company immediately following an approved merger is the value of that investment when last valued before the merger unless there has been a transaction (other than the merger) that has necessitated the revaluation of the investment.
Suppose two VCTs merge. Both VCTs own shares in same investee company but one holding qualifies, because more than 10% of shares are eligible, and the other doesn’t.
VCT1 has shares last valued at £30,000 and £70,000 loan notes in the Investee Co. The holding meets all the other qualifying requirements. The holding qualifies.
VCT2 has shares last valued at £20,000 and £220,000 loan notes in the same Investee Co. The holding does not qualify because of ITA07/S289.
Immediately following the merger, merged VCT has shares valued at £50,000 and £290,000 loan notes in the investee company. The holding qualifies.
A merger may involve a VCT launched pre FA98 and another launched post FA98. In such cases ITA07/S289 will apply to the successor VCT but the grandfathering provision of FA98/S72(5) will continue to run in relation to any investments acquired using funds raised by, or derived from, shares or securities issued before 2 July 1997.
The merger involves two existing VCTs but VCT1 was launched pre FA98 and VCT2 was launched post FA98. If VCT2 transfers holdings to VCT1 do those holdings become eligible even if they do not comply ITA07/S289?
No, because as VCT2 was launched post FA98 clearly the money used by the VCT for the investment must have been originally raised after 1 July 1997. Even if VCT1 holds the investment it will be bound by same rules.