The Regulations will prevent investments made by VCTs in companies which are involved in certain kinds of corporate re-structuring from ceasing to qualify for the scheme.
To meet the rules of the scheme, at least 70% of a VCT's investments must be made in small, higher-risk trading companies and at least 30% of the VCT's investment in these qualifying holdings must be comprised of ordinary shares.
Small higher-risk companies are defined as unquoted trading companies with gross assets of no more than £15 million immediately before the investment and no more than £16 million immediately afterwards.
A company in which a VCT invests may be sold to another company, merge with another company or undergo internal capital reconstruction. In this case, the VCT, as a minority shareholder, may not be able to sell its investment, but may have to exchange it for shares or securities in the purchaser or post-merger company, or for different shares or securities in the original company.
The existing VCT rules mean that any shares acquired in this way do not meet the 70% or 30% requirements, even if they would have counted had the VCT subscribed for them directly.
If the reason that the investment in the new shares or securities would not count towards the 70% or 30% conditions is because it was received in exchange for other shares or securities that were qualifying investments, rather than being subscribed for in cash, the new regulations will allow the investment to qualify.
In all other cases VCTs will now have a period of up to 3 years to dispose of the new investment (two years where the investments are not in unquoted companies), during which period the investment will be treated as though it counted towards the 70% and 30% conditions.
The Regulations will apply to re-structuring that has taken place on or after 21st March 2002.