If I have a VM running Windows 8 Consumer/Release Preview, am I allowed to take advantage of the Windows 8 upgrade offer, and install it on that machine?

I would have assumed not...as there was never a licensed version of XP SP3 through to Windows 7 installed in that VM. It was a clean installation of the Consumer Preview into a VM.

My confusion comes from the notes at the bottom of the download page for the Upgrade offer which states:

Offer valid from October 26, 2012 until January 31, 2013 and is for individuals and small businesses needing to upgrade up to five devices. If you are a business customer looking to upgrade more than five devices to Windows 8 Pro, contact your Microsoft partner for more information. To install Windows 8 Pro, customers must be running Windows XP SP3, Windows Vista, Windows 7, Windows 8 Consumer Preview, or Windows 8 Release Preview.

I am assuming it's not possible and i'll need to purchase the System Builder edition to install within a VM?

My guess is that you can use your downloaded upgrade offer only if you updated Windows 7 to the release preview, and therefore had the Windows 7 license on the machine, I used the serial number from the Microsoft Website when downloading the Release Preview, and did a clean install, so there was never a Windows 7 license on the VM.

I have MSDN for development purposes, but I am looking to run in a VM for personal use as well, so my MSDN license is not valid for that particular use.