The substantial shareholdings exemption (SSE) is a valuable relief for companies. The SSE rules broadly provide that a gain on a disposal by a company of shares in another company (or an interest in shares, or certain assets related to shares) is generally not a chargeable gain, provided two conditions are met:
- the company making the disposal (the ‘investing company’) held a ‘substantial shareholding’ in the company whose shares are being disposed of (the ‘investee company’);
- certain requirements are met in relation to the investee company, which largely involve the company being a trading company or the holding company of a trading group or a trading subgroup for a specified 12-month period prior to the disposal (and in some cases immediately after the disposal).
Perhaps unsurprisingly, there are circumstances where the SSE does not apply, and there are certain exclusions from SSE; these are not considered here.
Is it ‘substantial’?
The first condition (the ‘substantial shareholding requirement’) is that the investing company held a substantial shareholding in the investee company throughout a 12-month period beginning not more than six years before the day of disposal.
A ‘substantial shareholding’ is broadly at least 10% of the investee company’s ordinary share capital and beneficial entitlement to at least 10% of the profits and assets available for distribution to equity holders.
Usefully, there is a relaxation in the 12-month substantial shareholding requirement if the following conditions are satisfied:
- Immediately before the disposal, the investing company held a substantial shareholding in the investee company;
- At the time of the disposal the transferred asset was being used for a trade carried on by the investee company;
- At the time of the asset transfer to the investee company, the companies were members of the same group;
- the asset must previously have been used by a member of the group (other than the investee company) for a trade carried on by that group member.
If these conditions are met, the investing company is treated as having held the substantial shareholding at any time during the 12-month period ending with the disposal, including a period before the company invested in existed.
For example, Company A had a wholly-owned subsidiary (B). A is selling a trade to a third party. A sets up another company (C) and transfers the target trade to C. A few months later, A sells its shares in C.
Although A owned C for only a few months, for SSE purposes it is treated as meeting the 12-month substantial shareholding requirement by including the period when A used the transferred assets for a trade.
Don’t leave me this way…
However, suppose A had been a standalone trading company before forming and transferring assets to C and selling C shortly afterwards?
Those were broadly similar to the circumstances in M Group Holdings Ltd v Revenue and Customs ( UKFTT 69 (TC)). Unfortunately, the First-tier Tribunal held in that case that SSE was not due, as A could not be treated as a group member during the period when it was a standalone company.
If a standalone trading company is likely to dispose of a trade in the future, consider creating a subsidiary at least 12 months in advance to enable a ‘hive-down’ prior to a disposal of the subsidiary’s shares.
The above article was first published in Business Tax Insider (September 2021) (www.taxinsider.co.uk).