The UK’s Substantial Shareholdings Exemption (“SSE”) will be extended from April 2017. The main beneficiaries will be investment companies selling shareholdings of 10% or more in trading companies and companies owned by institutional investors which are themselves exempt from UK tax on capital gains
The SSE was introduced in 2002 to permit trading groups to sell subsidiaries without a charge to tax on the sale profit. It is not restricted to groups but is also available to corporate shareholders who have held 10% or more of the target company for a continuous period of at least 12 months in the two years immediately preceding the sale. Currently the seller must be a trading company or a member of a trading group, and the target company must be a trading company or the holding company of a trading group or sub-group, from the start of the 12 month qualifying period to the time of disposal and immediately afterwards. It does not currently apply to investment companies. The requirement that the trading conditions must be met immediately after the sale have caused problems even on sales out of trading groups, particularly where the seller is a holding company selling its last subsidiary or the seller cannot be certain what the buyer’s plan are for the target post-sale.
Legislation will be introduced in Finance Bill 2017 to make the following amendments with effect for disposals on or after 1 April 2017:
- No change to the general 10% shareholding requirement but there will be a more generous period within which to satisfy the 12 month continuous ownership period, increased from two years to six years before the day of disposal. This means that the seller will have more time to dispose of the remainder of its shares after its shareholding falls below 10%.
- Where the new subsidiary exemption relating to companies owned by qualifying institutional investors applies, the substantial shareholding condition may be met if the investing company’s shareholding is below 10% of the ordinary share capital but cost more than £50 million.
- There will no longer be any requirement for the selling company to meet any trading requirement either individually or as part of a wider trading group. Therefore investment companies may be able to benefit from the SSE if they have holdings of 10% or more in trading companies/groups. They will, however, not benefit from the SSE on sale of shares in investment companies (unless they are owned by exempt investors, see below).
- It will continue to be necessary for the company disposed of to meet the trading condition up to the time of disposal. However, the requirements for the trading condition to be met immediately post-disposal will apply only in circumstances where the sale is to a person connected to the investing company. Sellers will therefore no longer need to worry about losing the benefit of the SSE because of the actions of an unconnected buyer post-sale.
- For companies owned by Qualifying Institutional Investors (including pension funds, charities, investment trusts and other funds which are exempt from CGT), there will be a new subsidiary exemption which only requires that the substantial shareholding condition is met, but does not require the company disposed of to satisfy the trading condition. If at least 80% of the ordinary share capital of that company is owned directly or indirectly by one or more qualifying investors, then gains and losses on a disposal of shares will be exempt in full. Where between 25% and 80% is so owned, then a proportionate exemption is available. The logic for this new exemption appears to be that, if the underlying owners are exempt from CGT, they should not become liable to it indirectly by investing via a UK company.
These changes are very welcome. They remove some anomalies and should provide greater certainty to sellers. HMRC acknowledged in an earlier consultation process that the SSE was not as generous as comparable participation exemptions available in a number of European jurisdictions and these measures will help to make the UK more attractive as a jurisdiction for holding companies.