VCT guide

19 18 RULES FOR VCTS RULES FOR VCTS Rules governing portfolio construction There are a number of rules governing portfolio construction for VCTs. VCTs must: 1. Derive their income wholly or mainly from shares and securities. 2. NOT retain more than 15% of the income from shares and securities. 3. NOT hold an investment in a company that exceeds 15% by value of the VCT’s total investments. 4. Have at least 80% of their investments in qualifying trading companies (for VCT accounting periods ending before April 2019 this percentage was 70%). 5. NOT make an investment in a company that causes that company to receive: • more than £5m of State-aided investment (which includes EIS and VCT investment) in the 12 months ending on the date of the investment (this increases to £10m for qualifying knowledge-intensive companies (more details are available on knowledge-intensive companies on page 25) from 6 April 2018); or • more than a lifetime total of £12m (£20m for a knowledge-intensive company). 6. In general, NOT invest in a company whose trade is more than seven years old (ten years for a knowledge-intensive company). 7. Only make minority investments (less than 50%) in investee companies. 8. NOT invest in a company that goes on to use the VCT funds to acquire another company or business. 9. VCTs must only invest in: • Qualifying holdings (i.e. unquoted where ”unquoted” means not quoted on a recognised investment exchange, for example the Main Market of the LSE, meaning that companies quoted on AIM can be VCT qualifying investments) in or qualifying trading companies that meet certain conditions; • certain permitted non-qualifying holdings (cash and short-term deposits, allowed for liquidity management purposes, together with listed shares and securities). At least 10% of a VCT’s investment in a company must be in “eligible shares” (broadly, ordinary shares that don’t carry any present or future preferential rights). The remainder of a VCT’s investment in a company can comprise any class of shares (even preference shares) or loans. However, loans must not be secured or guaranteed, be repayable within five years (other than in default situations) and must be at a commercial rate of interest. The qualifying trading companies in which VCTs invest must also meet a number of detailed rules, as described on page 23. A trade is NOT a qualifying trade if it consists of certain ‘excluded activities’. Excluded activities are explained further on page 23 . Returning capital to shareholders A VCT must NOT return capital to shareholders within three years of the end of the accounting period during which the shares were issued. If it does, this is a prohibited payment and could result in the VCT losing its qualifying status. In addition, certain arrangements that previously allowed investors to sell and then buy back shares in the same VCT, thus qualifying for another round of tax relief, are now excluded. If an investor buys shares within six months of a disposal of shares in the same VCT, the shares will not qualify for a new round of tax relief. This applies whether the disposal takes place before or after the purchase of shares in the same VCT. Qualifying companies lntroducing the rules In order to ensure that VCTs are meeting their objective of financing small to medium-sized businesses that might otherwise struggle to obtain investment from other sources, there are stringent criteria that govern whether a company and its proposed share issue is a qualifying investment for a VCT. These criteria change from time to time. A VCT may well have a portfolio of existing investments that would not currently qualify if being made as new investments (such as renewable energy investments, hotels and care homes) and such investments are effectively ‘grandfathered’ from the current rules (although no new investments in such trades can be made by the VCT). This section sets out the rules as they stand today and also details some of the most recent changes. Timeline of share acquisition and disposal in a single VCT by a single investor VCT shares subscribed for FEBRUARY 1 Investor sells their VCT shares on 1 February having qualified for income tax relief AUGUST 1 AUGUST 2 4 years 6 years 1 year 5 years Period during which no tax relief is available if the investor buys additional shares in the VCT