VCM54095 - VCT: VCT approval: non-qualifying loan investment

As set out in VCM54090 a loan investment can only be a ‘security’ for the purposes of Part 6 if no part of it is repayable within five years.

In this context repayment includes any payment, however described, that has the effect of returning loan principal to a VCT. This can apply to interest rates and other costs that are significantly in excess of commercial rates. Rather than being purely payments for the use of the money lent, they can be seen as partly a repayment of the capital.

The definition of ‘securities’ in ITA07/S285 was amended by section 17 and Schedule 5 of the Finance Act 2018. This change ensured that loans with terms that provide an excessive return to the investor are excluded from that definition (ITA07/S285(2A)(a)). Loans of this type entered into on or after 15 march 2018 cannot be ‘securities’ and be part of a VCTs qualifying holding.

The ‘return on the loan’ refers to all charges, of whatever description, payable in relation to the loan. It will include all payments due under the terms of the loan agreement itself. It will also take into account costs incurred by the borrower under any other agreement or contract entered into in connection with the loan. The return on the loan can therefore include items such as arrangement fees, management fees and administration charges. This will apply whether or not these side agreements are legally enforceable.