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HMRC internal manual

Capital Gains Manual

Investors’ relief: receipt of replacement value

TCGA92/Sch7ZB/Para 4

 

This rule means that certain receipts of value do not prevent shares for qualifying for Investors’ Relief where they are in effect repayments of value that has been transferred by the investor.  It replicates the rule for Enterprise Investment Scheme deferral relief.

It only applies to receipts during the “period of restriction” which is the period that begins one year before the shares are issued and ends immediately before the third anniversary of the date the shares are issued.

The receipt of value rules apply to persons connected with the issuing company and the investor so this legislation is drafted in terms of “the original supplier” of “the original value” to “the original recipient” of “the replacement value”.  The use of these terms can be shown in a simple example –

Ms A has subscribed for shares in B Ltd.  Shortly after the share issue B Ltd pays Ms A £100. However, Ms A had previously [in the 12 months prior to the share issue] transferred £150 of value to B Ltd.

 

In this case –

  • The original value is the £100,
  • The original supplier of that value is B Ltd,
  • The original recipient of that value is Ms A, and
  • The £150 is the replacement value.

A receipt of value (the “original value”) during the period of restriction will not prevent shares from being or becoming qualifying shares where the following conditions are satisfied:

  • At or before the time the original value is received, the original supplier has received replacement value from the original recipient,
  • The replacement value was in the form of a “qualifying receipt” described below, and
  • The amount of the replacement value is not less than the amount of the original value received.

So in the example, the original value of £100 is less than the replacement value but was the £150 a qualifying receipt?

 

Qualifying receipt

Paragraph 4(4) of Schedule 7ZB says that a receipt is a qualifying receipt if it arises from -

  • The original recipient (Ms A) making a payment to the original supplier (B Ltd) although some payments are ignored, as described below.
  • The original recipient (Ms A) acquiring any asset from the original supplier (B Ltd) and paying more than market value for it.
  • The original recipient (Ms A) disposing of any asset to the original supplier (B Ltd) for no consideration or for a price which is less than the market value of the asset.
  • An event that reverses the effect of an event which released or waived any liability of the investor to the company, or an undertaking to release the investor from such a liability to a third party which constituted a return of value under Paragraph 2(1)(d)
  • The repurchase of any share capital  or securities (or rights over them) previously sold by the investor and constituting a return of value under Paragraph 2(3)

A payment is not a qualifying receipt if it is a normal commercial payment which conveys nothing over and above a commercial rate for the asset or service.  Such payments are set out in Paragraph 4(5) of Schedule 7ZB and include: the supply of goods, services and assets, interest, and rent.

Payment to a person, includes payment made indirectly to that person or to the person’s order, or for the person’s benefit (TCGA92 Schedule 7ZB Para 2(7)).

Replacement value doesn’t necessarily have to be received after the original value is returned to the investor.  However receipts of replacement value cannot be taken into account more than once, and they are disregarded if they are received before the period of restriction begins (i.e. more than one year before the issue of the shares).

So returning to the example, say the £150 of value passed to B Ltd because Ms A sold it an asset at below market value.  B Ltd returning £100 of value to Ms A will not prevent her shares qualifying for Investors’ Relief.

See CG63500 for a general description of the relief and the layout of the guidance.