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HMRC internal manual

Venture Capital Schemes Manual

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EIS: deferral relief: shares issued on or after 6 April 1998: qualifying investments

TCGA92/SCH5B/PARA1 (2)

For shares issued before 17 March 2004.

The investor makes a qualifying investment if:

  1. eligible shares for which he or she subscribed wholly in cash, see VCM23060, are issued to him or her on or after 6 April 1998 at a qualifying time, see VCM23030. If the date of the share issue is before the date of disposal, only those shares which are still held by the investor at the date of disposal can form the qualifying investment;
  2. the shares are issued by a qualifying company, see VCM23050;
  3. on issue, the shares are fully paid up. Any undertaking to pay cash to any person at a future date in respect of the acquisition of the shares prevents the shares from being treated as fully paid up on issue for the purposes of this requirement;
  4. the shares are issued for bona fide commercial purposes and not as part of arrangements, the main purpose or one of the main purposes of which is the avoidance of tax, see VCM12080 onwards as the same rule applies for EIS Income Tax relief, ICTA88/S289 (6);
  5. the company satisfies the requirements of ICTA88/S289(1A), see VCM13080;
  6. all the shares comprised in the share issue - that is, all shares of the same class issued on the same day - are issued in order to raise money for the purpose of a qualifying business activity, see VCM12100;
  7. for shares issued on or after 7 March 2001, at least 80% of the money raised by the share issue is employed wholly for the purpose of the qualifying business activity referred to above by the company within the time limit in ICTA88/S289(3), see VCM12050, and 100% of it has been so employed no later than 12 months afterwards. But if an insignificant amount of the money is employed for some other purpose, it is to be disregarded.
  8. for shares issued before 7 March 2001, all of the money raised by the share issue is employed wholly for the purpose of the qualifying business activity referred to in (f) above by the company within the time limit in ICTA88/S289 (3), except where the deadline occurs on or after 7 March 2001 in which case the 80% and 100% rules in (g) above apply instead. Again, if an insignificant amount of the money is employed for some other purpose, it is to be disregarded.

For acquisitions on or after 6 April 1998 there is no upper limit on the amount of qualifying investments made by an investor in a year. However the amount that can be invested in a single company is limited

  • by TCGA92/Sch5B Para 1(2)(da) to £2m (increased to £5m by FA12 in respect of shares issued on or after 6 April 2012) in the year ending with the date the shares are issued, see VCM12030; and
  • by the gross assets rule in ITA07/s186, see VCM13110.

Also, the shares do not have to attract Income Tax relief in order to qualify for deferral relief.

For shares issued on or after 17 March 2004 the following changes apply:

  1. The issue may include ‘bonus shares’ without causing any of the above requirements to fail to be met. For this purpose, ‘bonus shares’ are shares which are not issued for payment, whether in cash or otherwise.
  2. Only the shares that are issued to investors who claim EIS Income Tax relief or deferral relief have to be issued to raise money for the purposes of a qualifying business activity. Other shares in the same share issue need not be issued to raise money. The requirement at g. above (that the money raised by the issue must be employed by the appropriate time limits) must, however, be met in relation to any money that is raised by the share issue, whether it is paid by EIS investors or other investors.

For shares issued after 5 April 2007 ITA07 applies in place of the ICTA88 references above.