Explanatory note

The Regulations amend the Venture Capital Trust (Exchange of Shares and Securities) Regulations 2002 (S.I. 2002/2661)(“the Existing Regulations”).

The Existing Regulations apply to exchanges of holdings of shares or securities made by a venture capital trust. In specified cases, where a holding which meets the requirements for qualifying investments for the purposes of Chapter 4 to Part 6 of the Income Tax Act 2007 (c. 3) is exchanged for a new holding which does not meet those requirements, the non-qualifying holding is permitted to be held by the trust.

The Regulations amend the Existing Regulations to apply where a venture capital trust exchanges a holding of permitted non-qualifying investments for another holding of non-qualifying investments. In the cases specified, the new holding is permitted to be held by the trust for a period set out in the Regulations.

Regulation 3 inserts new definitions in regulation 2 of the Existing Regulations, including a “non-qualifying exchange of shares or securities” defined in regulation 12 which is inserted by regulation 6 of the Regulations. Regulation 4 amends regulation 3 of the Existing Regulations such that regulations 4 to 11 of the Existing Regulations apply to an exchange of shares or securities defined in regulation 3 (“a regulation 3 exchange”). Regulation 5 amends regulation 11 of the Existing Regulations such that regulation 11 applies to regulations 7 to 10 of the Existing Regulations.

Regulation 6 inserts regulations 12 to 17 into the Existing Regulations. Regulation 12 defines a “non-qualifying exchange of shares or securities” which is an exchange to which regulations 13 to 17 apply.

Inserted regulation 13 provides that regulation 7 (exchange of shares or securities in the same company) of the Existing Regulations applies with modifications to a non-qualifying exchange of shares or securities, if that exchange would have fallen within regulation 4 had the exchange been a regulation 3 exchange. The new shares or securities are treated as satisfying the conditions in section 274(1) of the Income Tax Act 2007 only for the period of 12 months.

Inserted regulation 14 provides that regulation 8 (exchange of shares or securities for those in another company) of the Existing Regulations applies with modifications to a non-qualifying exchange of shares or securities, if that exchange would have fallen within regulation 5 had the exchange been a regulation 3 exchange. The new shares or securities are treated as falling within section 274(3A) of the Income Tax Act 2007 only for the period of 12 months (in the case of shares) or 18 months (in the case of securities).

Inserted regulation 15 provides that regulation 9 (reconstruction involving issue of shares or securities) of the Existing Regulations applies with modifications to a non-qualifying exchange of shares or securities, if that exchange would have fallen within regulation 6 had the exchange been a regulation 3 exchange. The new shares or securities are treated as falling within section 274(3A) of the Income Tax Act 2007 only for the period of 12 months (in the case of shares) or 18 months (in the case of securities).

Inserted regulation 16 provides that regulation 10 (earn-outs) applies with modifications to an exchange of shares or securities to which inserted regulation 14 or 15 applies.

Inserted regulation 17 provides that regulation 11 (apportionment) applies with modifications to an exchange of shares or securities to which inserted regulation 13, 14 or 15 applies.

A Tax Information and Impact Note has not been prepared for this Instrument as it contains no substantive changes to tax policy.