What does the no pre-arranged exits requirement in section 177 of the Income Tax Act 2007 prevent?

Section 177 prevents EIS income tax relief where the arrangements under which shares are issued include pre-planned exit routes such as share buybacks, trade cessations, disposal of substantial company assets, or schemes designed to protect investors from normal commercial investment risks through insurance, indemnity, guarantee or otherwise.

What are the four categories of prohibited arrangements under section 177 ITA 2007?

The four prohibited categories are: plans for repurchase, exchange or disposal of the issued shares or other securities; plans for cessation of any trade carried on by the issuing company or a connected person; plans to dispose of all or a substantial amount of the company's assets; and arrangements whose main purpose is protecting investors against normal investment risks.

What arrangements are permitted exceptions under the no pre-arranged exits requirement?

Permitted exceptions include share-for-share exchanges under section 247(1), conversions into a different class of share in the same company, winding-up arrangements that apply only for genuine commercial reasons and were not part of the issuing plan, and normal commercial insurance or risk protection taken out by the issuing company in the ordinary course of business.

What does the term 'issuing arrangements' mean for the purposes of section 177 ITA 2007?

Issuing arrangements cover both the arrangements under which shares are actually issued to the investor and any arrangements made before that issue which relate to or are connected with it. This deliberately wide definition is designed to catch any pre-planned exit strategy regardless of when or how it was put in place.

Income Tax Act 2007 section 177

The no pre-arranged exits requirement

Section 177 prevents EIS income tax relief where the arrangements under which shares are issued include pre-planned exit routes, trade cessations, asset disposals, or risk protection schemes designed to shield investors from normal investment risk.

The share issue arrangements must not include plans for the subsequent repurchase, exchange or disposal of the shares, or for the cessation of any trade carried on by the issuing company or a connected person, or for the disposal of all or a substantial amount (by value) of the company's or a connected person's assets.
Arrangements whose main purpose is to provide investors with partial or complete protection (through insurance, indemnity, guarantee or otherwise) against normal investment risks are also prohibited.
Certain arrangements are excluded from the prohibition: share-for-share exchanges under section 247(1), conversions into a different class of share in the same company, and winding-up arrangements that apply only for genuine commercial reasons and were not themselves part of the issuing plan.
Normal commercial insurance or risk protection taken out by the issuing company (or, where it is a qualifying parent company, by it and/or its subsidiaries) in the ordinary course of business is not caught by the prohibition.

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