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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: income tax relief: supplementary and general: acquisition of issuing company or insertion of new holding company

ITA07/S247 to S249

Normally an exchange of shares for other shares counts as a disposal. However, the EIS has a provision whereby in certain circumstances the new shares are effectively treated as being a continuation of the old holding. Thus the new shares are treated as having been issued when the old shares were issued and the original qualification periods continue to run.

The circumstances in which this treatment is available are where the effect of the exchange is to insert a new holding company over the original investee company. This may be done as part of a rationalisation of the structure of the business or in preparation for obtaining a listing on a stock exchange. The provisions do not apply where two companies become subsidiaries of the same new holding company or in the case of a take-over by an established company.

Conditions

  • At the time of the exchange, some relief is attributable to the old shares.
  • The new shares are shares in a company in which the only issued shares, immediately before the exchange, are the original subscriber shares.
  • HMRC confirmed in advance of the exchange that they were satisfied that it would be effected for bona fide commercial reasons and would not form part of a scheme or arrangement to which TCGA92/S137 (1) would apply - in other words, HMRC gave a clearance under TCGA92/S138 (1) - see CG52632.
  • The consideration received in exchange for the old shares consists wholly of the new shares.

These rules are implemented separately for income tax relief and deferral relief, and the income tax relief provision is applied for the purposes of the CGT disposal relief.

Other types of share exchanges

For guidance as regards the consequences of other types of share exchanges, see the following -

* EIS disposal relief VCM20000
   
* EIS deferral relief (shares issued before 6.4.98) VCM22000
* EIS deferral relief (shares issued after 5.4.98) VCM23000