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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: share exchanges

When an EIS company is taken over, the acquiring company may issue its own shares in exchange for the original shares.

The treatment of share exchanges where at the time of the exchange

  • deferral relief has been given and not withdrawn AND
  • where all income tax relief given has been withdrawn

changed where the new shares in exchange were issued on or after 22 April 2009 (TCGA92/Sch 5B/Para 9).

For share exchanges on or after that date where the above conditions are met, S135 -S137 TCGA 1992 is disapplied, so that the shares are treated as disposed of, only for the purposes of Sch 5B paras 3 and 4.

So the deferred gain comes back into charge (unless TCGA92/Sch5B/para 8 or para 9(2),(4) and (5) apply - see below) BUT the shares themselves are not treated as disposed of for other purposes of TCGA and consequently no chargeable gain or allowable loss will arise on the shares themselves at the time of the exchange.

TCGA92/SCH5B/PARA9 (1) (before 22 April 2009) and TCGA92/S150A (8)

Even though new shares are issued in exchange, where the shares are within categories (b) (prior to 22 April 2009) or (d) of VCM23220 there is a disposal and the deferred gain comes back into charge unless:

  • the deferral relief and any EIS income tax relief given on the original shares have been withdrawn, or
  • particular circumstances prevail, see below.

Deferral relief

For shares within category (b) of VCM23220, attracting only deferral relief, there are two sets of circumstances where a share exchange is not treated as a disposal and the deferred gain does not come back into charge.

  1. TCGA92/SCH5B/PARA8

Where:

  • on or after 6 April 1998 a company, having issued only subscriber shares, acquires all the shares (and securities) in an EIS qualifying company in exchange for the proportionate issue of its own shares (and securities) of a corresponding description, see VCM23240, and
  • the anti-avoidance provisions of TCGA92/S137 do not apply, see CG52505,

the share exchange is treated as not involving 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 deferral relief, see example at VCM23250.

  1. TCGA92/SCH5B/PARA9 (2),(4) and (5)

Where:

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

TCGA92/S135 applies if its conditions are met and the anti-avoidance provisions of TCGA92/S137 do not operate, see CG52500 onwards. This is not treated as a disposal and the deferred gain will not be brought back into charge on the share exchange and there is no crystallisation of any gain or loss on the shares.

Income tax relief and deferral relief

For shares within category (d) of VCM23220, attracting both EIS income tax relief and deferral relief, there are two sets of circumstances where a share exchange is not treated as a disposal and the deferred gain does not come back into charge.

  1. TCGA92/S150A (8D)

TCGA92/S150A (8D) effectively provides that where the conditions of ICTA88/S304A & ITA/S145, see below, are met, the new shares (and securities) stand in the place of the old shares (and securities) in all respects and the exchange of shares (and securities) is not treated as a disposal of the original shares (and securities). This means that the new shares which are exchanged for the old shares to which EIS income tax relief was attributable will attract the same disposal relief on a subsequent disposal as the original shares would have done. Where the conditions of ICTA88/S304A & ITA/S145 are met, category (d) shares also meet the conditions of TCGA92/SCH5B/PARA8 so that the new shares stand in the place of the old shares for EIS deferral relief purposes as well.

The conditions of ICTA88/S304A and ITA/S145 are that:

  • on or after 6 April 1998 a company, having issued only subscriber shares, acquires all the shares (and securities) in an EIS qualifying company in exchange for the proportionate issue of its own shares (and securities) of a corresponding description, see VCM23240,and
  • before the issue of the new shares (and securities) HMRC has notified either the old or the new 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.

See example at VCM23250.

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

Where:

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

TCGA92/S135 applies if its conditions are met and the anti-avoidance provisions of TCGA92/S137 do not operate, see CG52500 onwards. This is not treated as a disposal and the deferred gain will not be brought back into charge on the share exchange and there is no crystallisation of any gain or loss on the shares.

Anti-avoidance provisions of TCGA92/S137

Please note that the only matters considered by the Anti-avoidance Group (Intelligence) Clearance and Counteraction Team relate to the anti-avoidance provisions of TCGA92/S137. All other matters must be considered by the Inspector 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 CT&VAT (Technical) if the problem relates to income tax relief.

TCGA92/S150A (8) is similar to the provision in TCGA92/SCH5B/PARA9 (1).

TCGA92/S150A (8A) - (8C) are similar to the provisions in TCGA92/SCH5B/PARA9 (2), (4) and (5).

TCGA92/S150A (8D) is similar to the provision in TCGA92/SCH5B/PARA8.