Annex 1: Minor changes in the law made by the Act: Change 115: Exemptions: venture capital trust dividends: conditions for shares where share reorganisations have occurred: section 712
This change treats shares acquired as a result of a company reorganisation as satisfying the condition requiring them to have been acquired for genuine commercial reasons.
In order to qualify for the income tax exemption for distributions from venture capital trusts (“VCTs”) the shares in respect of which the distributions are made must satisfy certain conditions. The conditions are set out in paragraph 7(3) of Schedule 15B to ICTA. These include that:
	the shares were acquired “for bona fide commercial purposes and not as part of a scheme or arrangement the main purpose of which, or one of the main purposes of which, is the avoidance of tax” (paragraph 7(3) (a)(ia)); and
	they are not “shares acquired in excess of the permitted maximum for any year of assessment” (paragraph 7(3)(a)(ii)).
The first of those conditions was added by section 70 of FA 1999, and only has effect for shares acquired after 8 March 1999.
Paragraph 8(3) and (4) of Schedule 15B to ICTA apply where shares in VCTs are acquired in circumstances in which they are required by TCGA to be treated as the same assets as other shares. This covers the situation where there has been a reorganisation, for example, a bonus issue of shares or an issue of shares falling within sections 135 and 136 of TCGA. Under paragraph 8(3) and (4) of Schedule 15B to ICTA new shares acquired as a result of the reorganisation etc. are treated as being acquired within the permitted maximum i.e. as meeting the condition in paragraph 7(3)(a)(ii) of Schedule 15B to ICTA if the old shares were within the permitted maximum. However, no reference is made to the first of the conditions mentioned above i.e. the bona fide commercial purposes test.
For the issue of new shares to fall within sections 135 and 136 of TCGA, section 137(1) of TCGA must be satisfied. Section 137(1) of TCGA will only be satisfied if the share reorganisation was effected for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax liability. So, in practice, the Inland Revenue treat such new shares as having been acquired for bona fide commercial purposes as so meeting both conditions mentioned above.
Section 712 of this Act applies the same rules about new shares meeting the genuine commercial purposes condition as are applied about the permitted maximum condition.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.