A more substantial exemption

Published on 6 February 2018

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The Substantial Shareholdings Exemption (SSE) was introduced for disposals of shares by companies on or after 1 April 2002. It exempts companies from corporation tax on gains arising on the disposal of a substantial shareholding in another company; any losses are similarly not allowable.

Briefly, before 1 April 2017, the SSE could apply where each of the following conditions was met:

  • The company making the disposal (‘the investing company’) had owned at least 10% of the company whose shares are being disposed of (‘the investee company’) for a continuous twelve month period in the two years before the disposal (‘the qualifying period’).
  • The investing company was a trading company or a member of trading group throughout the qualifying period and immediately after the disposal.
  • The investee company was a trading company or a holding company of a trading group or a trading sub-group throughout the qualifying period and immediately after the disposal.

On 16 November 2017, the most recently enacted Finance Bill received Royal Assent, providing confirmation that with effect from 1 April 2017, the requirement that the ‘investing company’ be a trading company or a member of a trading group is removed and the ‘qualifying period’ is extended to six years.

In addition, the requirement that the investee company be a trading company immediately after the disposal has (with two exceptions) been deleted, and it has been made clear that the ‘qualifying period’ can include a period in which the investee company was held by a non-UK resident group member.

The removal of the ‘investing company’ trading requirement is, at one level a considerable simplification, in that it eliminates the need to perform a potentially time consuming and involved analysis of a vendor group that may be significant in size and spread across multiple jurisdictions.

Moreover, it may also open up intriguing planning possibilities. For example it should now be possible for a group whose activities comprise predominantly property investment, to nonetheless dispose of property development subsidiaries in a tax exempt fashion.

A new exemption for institutional investors

For a certain category of companies the changes are yet more far reaching. A new exemption has been created for so called Qualifying Institutional Investors (QII), for example pension schemes, charities and life assurance companies. The intention is to encourage them to hold their investments through UK holding companies.

Again from 1 April 2017, disposals of a ‘substantial shareholding’ by a company will be exempt from corporation tax where at least 80% of its shares are held by a QII. The activities undertaken by the company are irrelevant.

A partial exemption applies on a sliding scale where the QII holds at least 25% of the shares in the investing company. Indeed, even the 10% shareholding threshold itself is removed where the shareholding was originally acquired for a consideration of at least £20m.

It is likely that the new QII exemption will form part of the tax planning armoury of non-UK resident investors as they react to the announcement that all gains arising on UK land and property will fall within the UK tax net with effect from April 2019.

We are not quite there yet

The latest iteration of the SSE offers some helpful improvements to what was already an extremely useful relief. It was probably too much to hope that the government would agree to align the SSE with the Dutch participation exemption – which applies to all active companies (it follows that a Netherlands resident sub-holding company may provide a tax efficient structure by which a UK headquartered group could hold its investment activities). However, the UK tax authorities might profitably apply their attention to the ‘intangible fixed assets and SDLT traps’

A previous extension of the SSE undertaken by Finance Act 2011 has allowed vendor groups to package trading activities for disposal by way of a pre-sale hive down, with the normal degrouping charge on disposal swallowed up by the SSE.

Unfortunately, this treatment does not extend to the degrouping charges applicable either to ‘new’ intangibles or Stamp Duty Land Tax. The former in particular represents a real and growing problem, since more and more companies will have substantial value encapsulated in goodwill or other intangibles, either internally generated, or acquired from third parties on or after 1 April 2002.

The SSE is much improved, but perfection remains elusive.

If you would like to speak to Matthew about the above, he can be contacted here.

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