496 Disposals of shares

Summary

The purpose of this section is to make it unprofitable for an investor to dispose of shares within a specified period after their purchase. Accordingly, it seeks to provide an incentive to him/her to leave his/her money in the company and thus fulfil the purpose of the relief which is to encourage long term investment in risk capital.

Where a shareholder disposes of his/her shares within the period (in this note and in the section referred to as the “relevant period”) —

• beginning with the incorporation of the company and ending 3 years after the date the shares issue, or
• if the company was incorporated more than 2 years before the shares issue, beginning 2 years before that date and ending 3 years after the shares issue,

and the shares are sold, other than at market value, the whole of the relief on those shares is withdrawn. Where shares are sold at market value, any relief given is reduced by the amount of the sale price. No withdrawal of relief occurs where the disposal of shares is between a married couple who for income tax purposes are treated as living together.

Details

Withdrawal of relief on disposal

(1) Where a shareholder disposes of eligible shares within the relevant period (other than by an arm’s length bargain) his/her entitlement to relief in respect of those shares is withdrawn. If he/she sells the shares at an arm’s length price, the relief is reduced by the amount which he/she receives for the sale.

For this purpose, “disposal” takes its ordinary dictionary meaning and, therefore, includes such “natural” disposals as gifts and exchanges in addition to sales. Its meaning is extended (by section 488(2)) to include a disposal of an interest or right in or over shares, and also share for share exchanges within the meaning of section 587.

A disposal otherwise than by way of a bargain at arm’s length is not defined and accordingly takes its ordinary natural meaning (that is, disposal for a consideration which is not equivalent to the price which would have been obtained for them if sold on the open market).

Example

On 25 February 2014, X subscribes €20,000 for an issue of 20,000 shares of €1 each. He obtained relief under this Part amounting to €15,000 (Thirty fortieths of his investment)in 2014. He sold his shares in February 2015 for €12,000. On the assumption that this transaction was concluded at arm’s length, the relief granted for 2014 must be reduced as follows —

	€
Full investment	20,000
value of consideration received	12,000
Revised investment	8,000

Disposals by spouses/civil partners

(2) The withdrawal of relief does not arise where a disposal is made by one spouse/civil partner to the other at a time when they are treated as living together for income tax purposes within the meaning of section 1015 or of section 1031A.

If, however, following such a transfer of shares between spouses/civil partners the transferee disposes of those shares to a third party, within the relevant period the relief is to be withdrawn either to the full extent, where the disposal is not made by way of bargain at arm’s length, or to the extent of the proceeds of the disposal where the disposal is by way of bargain at arm’s length.

If, before this subsequent disposal takes place, the husband and wife/civil partners cease to be treated as living together for income tax purposes, any assessment for withdrawing relief arising from the disposal is to be made on the spouse/civil partner who makes the disposal to the third party.

Put and call options

(3)(a) References to an option or an agreement include references to a right or obligation to acquire or grant an option or enter into an agreement. Similarly, references to the exercise of an option include references to the exercise of an option which may be acquired or granted by the exercise of a right, or under an obligation, to acquire or grant an option or enter into an agreement.

(3)(b) No relief is available in respect of shares to which an option or agreement of the type described in the following paragraphs relates.

((3)(b)(i)(I) An option obtained in the relevant period either directly or indirectly which when exercised would, either under the terms of the option or because of any arrangement or understanding which is subject to the option, oblige the person from whom the option was acquired or any other person to purchase any eligible shares for a price which, having regard to the terms of the option or the terms of any arrangement or understanding relating to the option, is other than the market value of the eligible shares at the time the purchase is made.

(3)(b)(i)(II) An agreement entered into in the relevant period either directly or indirectly the terms of which, or under the terms of any other agreement or arrangement which is subject to the agreement which, would require the person with whom the agreement is made or any other person to purchase, or result in that person or any other person in purchasing eligible shares at a price which having regard to the terms of the agreement or to the terms of any agreement or understanding which is subject to that agreement is less than the market value of the shares at the time of the purchase or acquisition.

(3)(b)(ii)(I) An option granted in the relevant period either directly or indirectly which when exercised would, either under the terms of the option or because of any arrangement or understanding which is subject to the option, oblige the person who granted the option to dispose of any eligible shares to the person to whom the option is granted or to any other person for a price which, having regard to the terms of the option or the terms of any arrangement or understanding subject to the option, is other than the market value of the eligible shares at the time of the disposal.

(3)(b)(ii)(II) Similarly, in respect of any shares which are subject, either directly or indirectly, to an agreement which would require a person to dispose of eligible shares at a price that is less than the market value of the shares at the time of the disposal.

Mixed shareholdings

(4) Where an individual’s holding of ordinary shares in a company partly consists of shares in respect of which relief has been given under this Part and partly of shares which do not attract relief, a disposal of ordinary shares, (except where the disposal is one to which section 479(3) or section 512(2) applies) is to be treated for the purposes of this section as relating to shares in respect of which relief was given under this Part. This prevents avoidance of the retention rule by providing that relieved shares are to be treated as disposed of before unrelieved shares of the same class.

Priority of disposal

(5) Shares in respect of which relief has been given which are issued earlier are to be treated as disposed of before similar shares issued later.

No relief was available for the holding acquired on 10 February 2012. Initially full relief was obtained in 2012for the subscription made on 23 August, 2012, and relief of €31,750 was allowed in 2013.

X subsequently made the following disposal, by way of bargain at arm’s length —

Date	No.	Proceeds
		€
15 March, 2104	5,000	10,000

For the purpose of establishing whether relief should be withdrawn, the disposals must be matched with acquisitions as follows —

Disposal 15 March, 2014	5,000
Acquisition 23 August, 2012 (part)	5,000

Where a disposal occurs within a period of 3 years following the date of share issue, the relief available under this Part is adjusted. The amount of relief which can finally be obtained, therefore, is shown below —

Issue 23 August, 2012 – 7,500 shares		€
Not disposed of within 3 years – 2,500 shares
2,500 Cost × 18,000 7,500		6,000
Disposed of within 5 years – 5, 000 shares
5,000 Cost × 18,000 7,500		12,000
Less disposal consideration	10,000	2,000
Revised relief 2012	-	8,000

Bonus issue of shares

(6) Where there is an allotment of shares to a company’s shareholders in proportion to their holdings and that allotment is not made for any payment (for example, bonus issue), the shares comprising an individual’s new holding (the original shares on which the relief was given plus the bonus shares) are to be treated as shares in respect of which relief has been given and any disposal of those shares within the relevant period is treated as a disposal of shares in respect of which relief has been given (a part disposal of the new holding being treated as a disposal of a corresponding part of both the original shares and the bonus shares).

(6) These rules avoid the problems of identification which would otherwise arise if the shareholder retains the original shares and undertook a disposal of the bonus shares as a means of obtaining a return of capital invested on which relief has been given. Thus, the purpose of the relief (that is, to encourage long term risk investment in the capital of a company) could be frustrated and the investor could obtain a substantial benefit at the expense of the Exchequer while recovering a portion of his/her investment through the sale of bonus shares.

Example

X subscribed €10,000 for an issue of 10,000 ordinary shares in H Ltd on 4 September, 2012, which qualified for relief under this Part. The company made a bonus issue of two ordinary shares for each share held on 1 April, 2013, thereby increasing X’s holding to 30,000 shares. On 18 June, 2013 X realised €2,500 from the arm’s length sale of 12,000 shares.

The enlarged holding of 30,000 shares represents “a new holding” for the purposes of section 584(1). The disposal of 12,000 shares represents 40 per cent of the new holding and the relief must be restricted for 2012 as follow—

			€
Full relief	60% x €10,000		6,000
Restricted relief	40% x €10,000	4,000
Less value of consideration
received		2,500	1,500
Revised relief			7,500

Shares of the same class

(7) Shares in a company are not treated for the purposes of this section as being of the same class unless they would be so treated if dealt in on a stock exchange in the State.

Relevant Date: Finance Act 2019