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Progress with VCT regulations

The UK government has passed legislation to make it easier for certain investments by Venture Capital Trusts (VCTs) to retain their qualification for tax relief. The changes, announced in the March 2000 Budget, apply to investee companies that are merged or sold in exchange for shares.

John Spooner, director of Quester, which manages five VCTs, says the new legislation change is 100 per cent positive. He adds that there are all sorts of cases where two or three businesses may be merged in the interests of the shareholders and the companies. In these situations they will continue to qualify. VCTs investors get 20 per cent income tax relief on investments up to £100,000 and capital gains reinvestment relief, which allows them to defer capital gains tax on any profit if they reinvest it.

Since the VCT scheme was introduced in 1995 experience has shown a need for this share-for-share exchange allowance. “This government has been very good at flexing legislation to meet the needs of the market,” says Spooner. This year’s Budget also introduced changes allowing VCTs to retain their tax-approved status if they merge or are wound up, a move likely to make life easier for trust managers and to make the vehicle more appealing to investors. David Thorp, chairman of VCT manager ISIS Capital, said he thought the latest reforms had more pace and should be enacted in the New Year.

The circumstances when the new regulations apply are if a company that a VCT has invested in is sold, merged with another company or undergoes capital reconstruction. The VCT may have to exchange its interest in the company for shares or securities in the purchaser, post-merger company or different shares in the original company. Under the old rules these shares would not count towards the 70 per cent of a VCT’s investments which must be in small, high risk trading companies, even if they would have qualified if the VCT subscribed for them directly. The new regulations allow the shares to qualify in these situations. VCTs will then have three years (two years if shares are in an unquoted company) to dispose of the shares. The regulations apply to re-structuring that has taken place since March 21, 2000.