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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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EIS: deferral relief: shares issued on or after 6 April 1998: meaning of receiving value and amount of value received

TCGA92/SCH5B/PARA13 (2), (4) and (5)

An investor receives value from the company if the company:

  • Repays, redeems or repurchases any of the investor’s shares or securities in the company, or if it makes any payment to him for giving up his right to any shares or securities.
  • Repays, carrying out any arrangements for or in connection with the acquisition of the shares, any debt owed to the investor other than a debt which was incurred by the company:

    • on or after the date the shares were issued, and
    • which was not a replacement of a debt incurred before that date.

(For shares issued prior to 17 March 2004 the debt referred to above is any which was incurred by the company on or after the date the shares were subscribed for. The date of subscription also applies where the debt was incurred before 17 March 2004 and the share subscription took place before that date but the shares were issued on or after 17 March 2004.)

  • Makes any payment to the investor for giving up his right to any debt.
  • Releases or waives any liability of the investor to the company or discharges, or undertakes to discharge, any liability of his to a third party. A release or waiver is treated as occurring if the liability is not discharged within 12 months of the time when it ought to have been discharged.
  • Makes a loan or advance to the investor which has not been repaid in full before the issue of the shares. This includes any debt (other than an ordinary trade debt, see VCM23330) incurred by the investor to the company and the amount of any debt due from the investor to a third party which has been assigned to the company.
  • Provides a benefit or facility for the individual.
  • Disposes of an asset to the investor at less than market value.
  • Acquires an asset from the investor at more than market value.
  • Makes any payment to the investor which is not a qualifying payment, see VCM23340.

TCGA92/SCH5B/PARA13 (5)

Other value received

An investor receives value from the company if a person connected (within the meaning of ICTA88/S291A) & Chapter 2 of Part 5 ITA07) with the company, or with a 51% subsidiary of the company, see VCM11050 onwards (ICTA88/S291):

  • purchases any of the shares or securities of the company which belong to the investor, or
  • makes any payment to him for giving up any right over such shares or securities.

This rule prevents investors from becoming eligible for more relief than would otherwise be available to them. Without the rule, investors could sell any shares in a company on which they have not had relief to shareholders who are connected with the company. Note that the rule applies whether the sale of shares precedes or follows the subscription for the shares on which relief is claimed, and applies to any types of share capital or securities, for example, preference shares or debentures.

Example

Company A, an EIS company, has total share capital of 40,000 £1 ordinary shares, X holds 24,000 shares with Y and Z holding 8,000 shares each.

Y and Z sell their shares to X at par and on the following day Y and Z subscribe for a further 20,000 £1 shares at par. The company thus obtains £40,000 but £16,000 of it has effectively come from X.

As there has been a return of value within TCGA92/SCH5B/PARA13 (5) to Y and Z the new shares are not eligible shares and no deferral relief is due.

TCGA92/SCH5B/PARA13A (1)

Amount of value received

The value received by an investor is quantified as shown below.

For value received within:

a, b or c of Para 13A(1) the amount received or, if greater, the market value of the shares, securities or debt in question.
   
d of Para 13A(1) The amount of the liability.
e of Para 13A(1) The amount of the loan or advance reduced by the amount of any repayment made before the issue of the shares.
f of Para 13A(1) The cost to the company of providing the benefit or facility less any consideration given for it by the individual.
g or h of Para 13A(1) The difference between the market value of the asset and the consideration (if any) given for it.
i of Para 13A(1) The amount of the payment.
TCGA92/SCH5B/PARA13 (5) The amount received or, if greater, the market value of the shares or securities in question.