2710.This section is based on paragraphs 7 and 8 of Schedule 15B to ICTA and sets out the conditions that have to be met in order for a VCT dividend to be exempt from income tax.
2711.Paragraph 7(3)(a) refers to “ … a dividend (including a capital dividend) …”. This is rewritten simply as “a dividend”. Section 209(2) of ICTA, which sets out the meaning of “distribution”, also refers to “any dividend paid by the company, including a capital dividend” (see section 209(2)(a) of ICTA). However, the charging provision in the source legislation (see section 20(1) paragraph 1 of ICTA) refers simply to “all dividends and other distributions … which are not specifically excluded from income tax … however they fall to be dealt with in the hands of the recipient”. Likewise the rewritten charging provision charges to tax “dividends and other distributions …” (see section 383 of this Act). Given that the charging provision does not specifically refer to capital dividends and an investor is unlikely to know that he or she is receiving a capital dividend, the reference to capital dividends is omitted.
2712.The conditions for exemption relate first to the dividend (subsection (2)), then to the investor (subsection (3)) and then to the circumstances surrounding the investment (subsections (4) to (7)).
2713.The exemption applies only to dividends paid on ordinary shares acquired within the annual acquisition limit of £200,000 (see subsection (4)). The value applied is market value as defined in section 272 and 273 of TCGA (see subsection (8)).
2714.The condition contained in subsection (6) is based on paragraph 7(3)(a)(ia) of Schedule 15B to ICTA which was inserted by FA 1999. The condition applies only to acquisitions made on or after 9 March 1999 (see subsection (1)(b)). Subsection (7) confirms that shares not acquired for genuine commercial reasons are not treated as using part of the annual acquisition limit whether those shares were acquired before or after 8 March 1999. Prior to the FA 1999 amendments, such shares were not “relevant acquisitions”. Following the FA 1999 amendments, dividends paid on such shares cannot qualify for exemption and therefore the shares are disregarded for the purposes of determining whether the annual acquisition limit has been exceeded.
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