Seed Enterprise Investment Scheme (SEIS): SEIS disposal relief: share exchanges: examples
In June 2012 an investor X subscribes £10,000 for 10,000 shares in a SEIS Company A. He receives SEIS Income Tax relief of £5,000. In August 2014 Company B, an existing 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 and as this disposal of the Company A shares is within three years of their date of issue it results in all the SEIS Income Tax relief attributable to them being withdrawn. No SEIS Income Tax relief is then attributable to the A shares and the share exchange provisions of TCGA92/S135 may apply to the disposal. If section 135 does apply to the disposal, for CGT purposes X will be treated as though he acquired the Company B shares in June 2012 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 a SEIS company.
Suppose the facts are the same as in example 1 above but the take-over by Company B is in August 2015 and Company B is a SEIS 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 there is no withdrawal of SEIS Income Tax relief. The share exchange provisions of TCGA92/S135 are not prevented from applying. If section 135 applies, X is treated for CGT purposes as though he acquired the Company B shares in June 2012 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.
Suppose the facts are the same as in example 2 but Company B is not a SEIS company and the shares X acquires in exchange for his shares in Company A are worth £4,000. The share exchange is treated as a disposal but the investor is able to claim a loss of £1,000 calculated as below.
|Disposal proceeds||£ 4,000|
|Reduced by IT relief not withdrawn||£ 5,000||£ 5,000|
An investor holds 100,000 £1 ordinary shares in X Ltd, a SEIS company, that is, a company which has issued one or more SEIS compliance certificates (SEIS3). The shares cost £100,000 and she has, in respect of those shares, received £50,000 Income Tax relief. Subsequently, Y Ltd, previously having only 2 subscriber shares, issues new £1 ordinary shares in exchange for all the shares in X Ltd. HMRC has given advance notification that they are satisfied that the exchange will take place for bona fide commercial reasons and will not form part of a scheme or arrangements to which TCGA92/S137(1) would apply.
The investor is not treated as disposing of the shares in X Ltd. The issue of shares in Y Ltd to the investor is deemed to have taken place on the same date and for the same price as the shares in X Ltd for which they were exchanged were issued. (If the investor acquired the shares in X Ltd on a disposal within a marriage or civil partnership, his or her acquisition of the shares in Y Ltd is deemed to be on the same date and for the same price as the shares in X Ltd were issued).
The Income Tax relief attributed to the shares in Y Ltd is deemed to have been claimed on those shares. Any disposal relief that would have been available on the disposal of the shares in X Ltd will become available on the subsequent disposal of the shares in Y Ltd.