Investor has purchased shares at a premium and made a loan to a company that intended to apply for EIS relief. Advance assurance was obtained from HMRC however due to problems the company has had to abort the proposed business and has therefore never traded. The investor wants out, however of the GBP20k shares purchased and the GBP5k loan the company only has cash left (due to preliminary expenses) of GBP15k and in principal the directors have agreed to return all this to the investor. From a company and investor perspective is there a preferred route of doing this? Investor pays tax at the higher rate. Does the fact that the company has never actually traded (although there was intention) mean that s131 relief is not available?
Any ideas gratefully received.
Many thanks.
Replies (4)
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More info needed
You say the investor 'purchased' the shares - did he? or did he subscribe for them?
What percentage of the share capital does he hold? (Assuming there are no other creditors, then he should get his loan repaid in full, leaving the balance of £10K to be distributed to the ordinary shareholders. So he would only be entitled to a proportion of that balance)
Sorry for the delay in getting back to you
OK, so the investor subscribed for the shares. If you are looking for s. 131 relief the you will also need an allowable loss on them – you can’t claim negligible value because they are still worth £2,000 so you need a disposal at arms length or a distribution in the course of winding up the company.
A question to be considered is whether a buy-back of the shares for £10,000, when they are only worth £2,000, is really a disposal at arm’s length? My guess is that it is not. Therefore you would seem to be left with a winding up. But of course, that should only give him the £2,000 to which he is entitled, the balance is due to the other shareholders.
You also need to consider the position of those other shareholders. They have shares worth £8,000. What was their acquisition cost? By allowing the investor to have all the remaining cash are they seeking to avoid a chargeable gain? Alternatively do they intend to claim a loss on the basis of no proceeds being received?
Yes I believe that Condition B is satisfied.
However, my concern here is that the investor is only entitled to £2,000 for his shares and yet it is proposed that he receive £10,000 at the expense of the other shareholders. For s.131 to apply, without a winding up, the disposal of the shares must be at arm’s length and I think you need to consider the comments at CG14542. It seems to me that there is an intention to confer a gratuitous benefit on the investor.