497 Value received from company

Summary

Where an individual subscribes for shares in a company and then withdraws his/her capital in one form or another within a 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 issue of the shares, or
• if the company was incorporated more than 2 years before the shares were issued, beginning 2 years before that date and ending 3 years after that date,

any relief in respect of shares he/she has subscribed for in that company is reduced by the value he/she received.

SURE investors who make their initial investment by way of a loan to a company (instead of investing in shares) qualify for the relief subject to certain conditions being met. The individual will not be regarded as having received value from the company in that situation.

Details

(1) “ordinary trade debts” are debts for goods or services supplied in the ordinary course of a trade or business where credit does not normally exceed 6 months and is not longer than that normally given to the customers of the person carrying on the trade or business.

(2) In the context of this section, “individual” is to be read as including that person’s associates.

(2)(b) References to “the company” includes any person connected with the company.

(2)(a) Payments or transfers to an individual or an associate include payments or transfers made indirectly or to that person’s order or benefit

(3) An individual receives value from a company, where the company —

• (3)(a) repays, redeems or repurchases any of its share capital or securities owned by the individual or pays the individual to renounce his/her rights to any such share capital or securities,
• (3)(b) repays any debt owed to the individual, however, an ordinary trade debt or a debt which is genuinely incurred by the company on or after the date he/she subscribed for the shares on which the relief is claimed (that is, a debt which is not simply in exchange for a debt incurred before that date) are not treated as the receipt of value,
• (3)(c) makes any payment to the individual for giving up his/her rights to any debt on its extinguishment,
• (3)(d) releases or waives any liability of the individual to the company or discharges any liability of the individual to a third person,
• (3)(e) makes a loan or advance to the individual,
• (3)(f) provides a benefit or facility for the individual,
• (3)(g) transfers an asset to the individual for no consideration or for consideration less than its market value, or acquires from the individual an asset at more than its market value, or
• (3)(h) makes any other payment to the individual.

(3)(b) Not treated as the receipt of value from a company are payments made to an individual for giving up his/her rights to a debt on its extinguishment, being a debt connected with the payment or reimbursement of reasonable expenses or payment for services rendered to the company (other than secretarial or managerial services or services of a kind provided by the company itself), or reasonable payments for services the profit from which would be assessable under Case I or II of Schedule D, or a payment in respect of a debt which is an ordinary trade debt or other genuine debt. Also not treated as the receipt of value are —

• expenses payments made to employees or directors,
• interest at a commercial rate paid in respect of a loan,
• normal dividends,
• payments for goods purchased which do not exceed the value of the goods,
• reasonable remuneration for employees and directors,
• reasonable payments for services the profit from which would be assessable under Case I or II of Schedule D.

(4) A specified individual will not have received value from a company where—

(4)(a)(i) an investment in the company by the specified individual was by means of a loan,

(4)(a)(ii) and the loan is converted into eligible shares within one year of the making of the loan,
and

(4)(a)(iii) the specified individual provides a statement by the company’s auditor that the money raised by the loan was used solely for the purposes referred to in section 493(1)(d).

(4)(b) Conversion of the loan into eligible shares is treated as the making of a relevant investment by the specified individual on the date the loan was made.

(5) Although the winding up or dissolution of a company undertaken for bona fide commercial reasons does not destroy the ability of that company to be treated as a qualifying company (see section 494(10)), any payment or asset which an individual receives in the relevant period by reason of such a winding up or dissolution is treated as value received from the company. Effectively it would be a redemption or part redemption of his/her shares.

(6) Where a shareholder receives his/her money back from someone connected with the company (within the meaning of section 492) rather than the company itself, the amount received from that person is treated as value received by the shareholder from the company.

(7) Rules are provided for the measurement of the amount of any value received in accordance with any of the methods described in subsections (3), (4) and (5).

(8) A company is to be taken as having released or waived a liability (for the purpose of determining whether value has been received) if the liability is not discharged within 12 months of the time when it ought to have been discharged.

(9) The term “loan” is to include the amount of any debt (other than an ordinary trade debt) incurred by the individual to the company and the amount of any debt due from the individual to a third person which has been assigned to the company.

(10) Where an individual receives value from a company within the relevant period that amount is to be deducted from the relief to which he/she would otherwise be entitled.

(11) Where relief is to be reduced by reason of the receipt of value the relief is to be reduced in respect of shares issued earlier rather than in respect of shares issued later.

Relevant Date: Finance Act 2019