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HMRC internal manual

Venture Capital Schemes Manual

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EIS: disposal relief: share exchanges: examples

Example 1

In June 2008 an investor X, subscribes £10,000 for 10,000 shares in an EIS Company A. He receives EIS Income Tax relief of £2,000 but claims no deferral relief. In August 2010 Company B, an existing trading company, acquires all the shares in Company A in exchange for the issue of one Company B share for each Company A share held. The Company B shares are worth £5 each. This disposal of shares causes all the EIS Income Tax relief attributable to them to be withdrawn. The share exchange provisions of TCGA92/S135 may apply to the disposal. If so, for CGT purposes X will be treated as though he acquired the Company B shares in June 2008 at an acquisition cost of £10,000 and any gain arising on the subsequent disposal of the Company B shares will be chargeable to CGT. This is the case whether or not Company B is an EIS company.

Example 2

Suppose the facts are the same as in example 1 above but the take-over by Company B is in August 2011 and Company B is an EIS company issuing its own ordinary shares carrying no present or future preferential rights etc to the shareholders in Company A. The share exchange takes place more than three years after the Company A shares were issued and, providing that income tax relief was not withdrawn, the share exchange provisions of TCGA92/S135 may apply. If so, for CGT purposes, X will be treated as though he acquired the Company B shares in June 2008 at an acquisition cost of £10,000 and any gain arising on the subsequent disposal of the Company B shares will be exempt from CGT.

Example 3

Suppose the facts are the same as in example 2 but Company B is not an EIS company and the shares X acquires in exchange for his shares in Company A are worth £5,000. The share exchange is treated as a disposal but the investor is able to claim a loss of £3,000 calculated as below.

Disposal proceeds   £ 5,000
     
Less cost £10,000  
Reduced by IT relief not withdrawn £ 2,000 £ 8,000
Allowable loss   (£3,000)