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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Share Loss Relief: individual and corporate claimants: individual claimants: more complex cases: shares received in exchange for other shares in a take-over: conditions for ITA07/S145 and S146 to apply

Assuming that Enterprise Investment Scheme (EIS) relief is not attributable to shares, there are five conditions which must be met before ITA07/S145 will apply the ‘no disposal and no acquisition’ treatment when there is a ‘share-for-share’ acquisition of one company by another.

Firstly the ‘new company’ which is to acquire the shares in the exchange must previously have issued only subscriber shares and must acquire all the shares in the other company (the ‘old shares’ of the ‘old company’).

Secondly the consideration for the old shares must consist wholly of the issue of new shares in the new company.

Thirdly the consideration given for new shares of each description must consist wholly of old shares of the corresponding description. (Old shares and new shares are of the corresponding description if, had they been shares of the same company, they would be of the same class and carry the same rights.)

Fourthly new shares of each description are issued to holders of old shares of the corresponding description in respect of and in proportion to their holdings

Fifthly TCGA92/S135 applies section 127 of that Act to the exchange so that the exchange is not treated as a disposal of the old shares or an acquisition of the new shares.

There are two further conditions to be met for section 146 to apply the rules which identify the new shares with the old shares:

  • EIS relief must not have been attributable to the old shares, and
  • the old shares must have been subscribed for by the individual.

We have seen at VCM75350 that ITA07/S145 applies to a subset of the cases to which TCGA92/S135 applies, and that ITA07/S136 will be in point in relation to the rest of the cases caught by TCGA92/S135. Section 145(3) disapplies the operative provision of section 136 in any case to which section 145 applies. This means that if the special, narrow conditions at section 145(1) are met the general prohibition on Share Loss Relief in respect of the new shares cannot run, and you do not have to consider section 136 further.

A takeover of one company by another necessarily involves the first company changing owners, and often losing a measure of independence in the process. This could have repercussions in terms of the control and independence requirement which must be met for the shares to be qualifying shares (see VCM74900 and VCM74910).

ITA07/S145(3) addresses this by providing that the control and independence requirement does not apply in relation to any exchange of shares within section 145(1), or to arrangements with a view to such an exchange. This means that in cases where section 145 applies the resulting change of ownership and loss of independence of the ‘target’ company are not in themselves fatal to the control and independence requirement being met. The requirement must still be met, but it is applied to the acquiring company or the target company on the basis of the assumptions in section 136(2): if the target company met the requirement at a time before the exchange then the acquiring company is treated as having met the requirement at that time also (and the acquiring company’s shares are treated as having been issued to the claimant when the target company’s shares were issued).

There is also a potential conflict between the rules in section 146 which identify the new shares with the old shares and the rules which govern the receipt of royalties and licence fees as an excluded activity for EIS purposes in section 195 (the same rules are adopted by Share Loss Relief: see VCM74620). Section 195(7) extends the scope of the phrase ‘issuing company’ to include the old, ‘target’, company in some share-for-share exchange cases.

The assumption at section 146(2)(c) allows the acquiring company (which is the issuing company) to be identified with the target company (and vice versa), and so it effectively duplicates the effect of section 195(7). But section 146 applies to a narrower range of share-for-share exchange cases than does section 195(7), so to avoid conflict between the EIS and Share Loss Relief codes section 146(3) disapplies the section 146 rules in favour of the section 195(7) treatment when deciding whether the excluded activity test is met in the necessary period specified by section 134(3) (see condition B for Share Loss Relief: VCM75000). In other words, the EIS rule for ‘looking through’ share-for-share exchanges takes precedence over the corresponding Share Loss Relief rule when considering whether the receipt of royalties and licence fees constitutes an excluded activity.