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HMRC internal manual

Venture Capital Schemes Manual

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EIS: disposal relief: share exchanges

When an EIS company is taken over, the acquiring company may issue its own shares in exchange for the original shares; that is the shares which have attracted EIS income tax relief. This is a disposal of the original shares for CGT purposes even though new shares are issued in exchange (i.e. TCGA92/S135 - 137 is disapplied) unless:

In cases where EIS deferral relief is not attributable to the shares:

  • all the EIS income tax relief given on the original shares has been withdrawn; this may occur as a consequence of the take-over itself if the EIS company ceases to be a qualifying company as a result of the transactions, see VCM15000+, or

In cases where EIS deferral relief is attributable to the shares OR where deferral relief is attributable and not all the income tax relief is withdrawn:

  • the share exchange takes place on or after 6 April 1998 and falls within TCGA92/S150A(8D), see below, or
  • the new shares are issued on or after the termination date, see VCM23070, relating to the original shares or, where the original shares were issued before 6 April 2000, more than five years after the original shares were issued and meet the conditions set out in TCGA92/S150A(8A) to (8C), see below.

In cases where EIS deferral relief is attributable to the shares, all the income tax relief is withdrawn and the new shares are issued before 22 April 2009;

  • the share exchange takes place on or after 6 April 1998 and falls within TCGA92/Sch5B/Para 8 (see VCM23230); or
  • the new shares are issued on or after the termination date, see VCM23070, relating to the original shares or, where the original shares were issued before 6 April 2000, more than five years after the original shares were issued and meet the conditions set out in TCGA92/Sch5B/Para9 (2)(4) and (5) (see VCM23230)

In cases where EIS deferral relief is attributable to the shares, all income tax relief is withdrawn and the new shares are issued on or after 22 April 2009, there will be no disapplication of S135-S137 and there will be no deemed disposal unless S137 applies (see below).

TCGA92/S150A(8D), ITA07/S247

TCGA92/S150A(8D) effectively applies the provisions of ITA07/S247 for CGT purposes.

Where:

  1. on or after 6 April 1998 a company, having issued only subscriber shares, acquires all the shares (and securities) in an EIS company in exchange for the proportionate issue of its own shares (and securities) of a corresponding description, see below, and
  2. before the issue of the new shares (and securities) HMRC has notified the new company or the old company that they are satisfied that the share exchange will take place for bona fide commercial reasons and will not form part of any such scheme or arrangements as are mentioned in TCGA92/S137(1), see CG52505,

the share exchange is not treated as a disposal of the original shares and the new shares stand in the place of the old shares in all respects and attract the same relief, see the example at VCM23250. Similar provisions in cases where deferral relief have been given are contained in Para 9.

Anti-Avoidance provisions of TCGA92/S137

The Anti-avoidance Group Clearance and Counteraction Team only consider matters that relate to the anti-avoidance provisions of TCGA92/S137. All other matters must be considered by the HMRC officer dealing with the company in the first instance with reference to Capital Gains Technical Group if the problem relates to deferral or disposal relief or CTIS (Structure, Incentives & Reliefs team) if the problem relates to income tax relief.

Corresponding description

Corresponding description means that if the new shares (and securities) were shares (and securities) in the old company they would be of the same class and carry the same rights as the original shares (and securities). Shares (and securities) would be of the same class if they would be so treated if dealt with on the Stock Exchange.

TCGA92/S150A (8A)-(8C)

Where:

  1. one EIS qualifying company, that is a company which has issued one or more EIS3 certificates takes over a second EIS qualifying company, and
  2. the acquiring EIS company issues its own ordinary shares carrying no present or future preferential rights etc on or after the termination date, see VCM23070, relating to shares (the original shares) in the second company to which EIS income tax relief is attributable or, where the original shares were issued before 6 April 2000, more than five years after the original shares were issued,

TCGA92/S135 may apply resulting in no disposal of the original shares if its conditions are met and the anti-avoidance provisions of TCGA92/S137 do not operate, see CG52500 onwards.