VCM23250 - EIS: deferral relief: shares issued on or after 6 April 1998: share exchanges: example
TCGA92/SCH5B/PARA9, ITA07/S254(2)
Example 1- share exchange on or after 22 April 2009
An investor holds 100,000 £1 ordinary shares in X Ltd, an EIS company, that is, a company which has issued one or more EIS3 certificates. The shares cost £100,000 and he or she has, in respect of those shares, received £20,000 income tax relief and £100,000 deferral relief relating to a gain from the disposal of another asset.
On 1 May 2009 Y Ltd, a non EIS company that has been trading for some years and with 200 shares in issue, issues new £1 ordinary shares with a market value of £150,000 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 treated as disposing of the shares for the purposes of IT relief (ITA07/S254(2)) and as the disposal value multiplied by the EIS rate exceeds the relief attributable to the shares (ITA07/S209) the IT relief is withdrawn in full.
As the shares now have deferral relief but not income tax relief attributable to them, TCGA92/Sch5B/Para9(1) applies. For the purpose of TCGA92/Sch5B/para 3 and para 4 only, TCGA92/S135-S137 are disapplied and the shares are treated as disposed of. The disposal gives rise to a chargeable event for deferral relief purposes and the deferred gain of £100,000 is recovered in full.
For all other purposes of TCGA92, S135-S137 continues to 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 marriage, 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.)
No chargeable gain or allowable loss on a disposal of EIS shares themselves will therefore arise at the time of the share exchange.
Example 2- share exchange before 22 April 2009
The scenario is as example 1 but the share exchange takes place on 1 May 2008.
The IT relief is withdrawn in full as in the previous example.
As the shares now have deferral relief but not income tax relief attributable to them, TCGA92/Sch5B/Para9(1) (as it stood before FA2009) applies. TCGA92/S135-S137 are fully disapplied and the shares are treated as disposed of. The disposal gives rise to a chargeable event for deferral relief purposes and the deferred gain of £100,000 is recovered in full.
The shares are also treated as disposed of for normal CGT purposes, so a chargeable gain before reliefs of £50,000 (£150,000 - £100,000) will arise on the disposal of the shares themselves.
TCGA92/SCH5B/PARA8, TCGA92/S150A (8D), ICTA88/S304A & ITA/S145
Example 3- share exchange by company with subscriber shares only
An investor holds 100,000 £1 ordinary shares in X Ltd, an EIS company, that is, a company which has issued one or more EIS3 certificates. The shares cost £100,000 and he or she has, in respect of those shares, received £20,000 income tax relief and £100,000 deferral relief relating to a gain from the disposal of another asset.
On 1 May 2009 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 marriage, 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 and deferral reliefs are attributed to the shares in Y Ltd and are 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. In addition, the information requirements on X Ltd pass to Y Ltd, see VCM23480.
Company reconstruction and amalgamation
Although this guidance refers specifically to share exchanges, the same principles apply to company reconstruction and amalgamation within TCGA92/S136 where appropriate. For general guidance on share exchanges and company reconstruction and amalgamation see CG52500 onwards.