VCM12080 - EIS: income tax relief: general requirements: no pre-arranged exits requirement

ITA07/S177

Pre-arranged exits

No relief is available in respect of shares if the arrangements under which they were issued, or any arrangements which otherwise relate to or are connected with the issue, include:

• arrangements which might in any way lead to the disposal of the shares, or of other shares in the company,
• arrangements which might lead to the cessation of the company’s trade, or of any trade carried on by a person connected with the company,
• arrangements for the disposal of some or all of the assets of the company or of any person connected with the company.

This rule is intended to ensure that the company is capable of carrying on its trade indefinitely under its existing ownership. There is a let-out for arrangements, of the kind which might be found in a company’s Articles of Association, which merely ensure that if its trade fails the company can be wound up in an orderly manner.

The rule does not stop the directors of a company from indicating in advance to potential investors how they envisage that shares in the company might be disposed of at some later date.

Underpinning value

No relief is available in respect of shares if the arrangements under which they were issued, or any arrangements which otherwise relate to or are connected with the issue, include arrangements which are intended to protect the value of the investment in any way. This includes, for example, schemes which insure investors against making a loss, and schemes to maintain the value of the shares artificially. There is an exception for ordinary commercial matters such as insurance by the company against normal trading risks.