The Blog

Substantial Shareholdings Exemption (SSE): 4 key facts you can’t afford to ignore

The Substantial Shareholdings Exemption regime (SSE) is a valuable exemption in corporate groups and allows the sale of certain shares in subsidiaries from corporation tax to be exempt from any capital gain.

First introduced in the UK by the Finance Act 2002, the SSE can currently be found in Schedule 7AC of the Taxation of Chargeable Gains Act 1992 and exempts the disposal shares in subsidiaries from corporation tax provided certain conditions are met.

Broadly speaking the original exemption came into force when gains were generated when the:

  • Investor company making the disposal was a trading company or a member of a trading group and;
  • Investee company was a trading company or the holding company of a trading group (or subgroup), and the investing company held a ‘substantial shareholding’ (broadly, at least a 10% interest) of the investee company, and;
  • Shares were part of a total holding of at least 10% held for a continuous 12-month period, beginning not more than two years before the disposal. If the shares were disposed of piecemeal then, providing that this condition was met, a disposal of less than 10% would still be eligible for the exemption.

However, that was how the SSE used to work. As part of proposals published within the Finance Bill 2017, various amendments to the existing rules have been applied in the Finance (No 2) Act 2017.

Here are 4 key facts about the changes and what they mean for the regime going forward:

 FACT 1: THEY’RE SET TO HAVE A POSITIVE IMPACT

Now implemented in the Finance (No 2) Act 2017, the changes are expected to result in the SSE being easier to apply and more widely available. The new rules will enable investment groups with trading subsidiaries to benefit from the exemption.

 FACT 2: THEY DON’T APPLY TO ALL DISPOSALS

The changes only apply to disposals made on or after April 1, 2017.

FACT 3: CERTAIN CONDITIONS HAVE BEEN REMOVED

The following two conditions no longer apply:

1. Investing company trading condition

The availability of the SSE on a disposal will no longer depend on the status of the investing company group. The trading status is now relevant only to the investee company.

With the old regime, there was often uncertainty as to the requirement that the investing company (i.e. the company making the disposal) was either a trading company or member of a trading group. The removal of this requirement removes the uncertainty as the trading status of the group will no longer need to be considered.

2. Post-disposal investee trading condition

Where a disposal is to an unconnected party, disposals after April 1, 2017 will not require the investee company to continue to be a trading company immediately after disposal, unless the purchaser is a connected party.

This provides greater certainty as the investor company has no control of the investee company once it has disposed of its shareholding.

FACT 4: CERTAIN TIMESCALES HAVE BEEN EXPANDED

The period over which the 12-month substantial shareholding requirement can be satisfied has been increased from two to six years.

Under the old rules, the investing company was required to have held a shareholding of at least 10% of the ordinary share capital in the company whose shares are being sold for at least 12 months in the two years prior to the date of disposal.

This two-year requirement enabled an investing company to continue to qualify for SSE where it sold the shares piecemeal so long as, once its shareholding fell below 10%, all the remaining shares were sold within a further 12 months.

This extension of the holding period will undoubtedly introduce greater flexibility, as it will allow a seller, who’s reducing their holding in tranches, to retain a holding of less than 10% for up to 5 years whilst still benefitting from SSE on sale of the final tranche.

Got any questions or want to find out more about the SSE changes? Or perhaps you’d like to make sure you’re benefiting from them? Contact us on 01905 777600 or andyhunt@ormerodrutter.co.uk.


About the Author

Andy heads up Ormerod Rutter Corporate Solutions along with Peter Orton, specialising in corporate tax planning and solutions, as well as undertaking specialist tax planning work for external clients, other accountants and solicitors.

 


 

Tax relief changes for residential landlords: The ins and outs

As of next month (April), the Government’s widely-debated plans to limit residential landlords’ tax relief are set to come into force.

 But what will the changes involve? Will they impact all landlords? And what action, if any, should people be taking right now? David Gillies explores the ins and outs of the new tax changes, which have been the subject of much discussion and debate since they were first announced by the Government last year.

From April 6, 2017, tax relief on interest and finance costs for landlords with residential properties will start to be reduced to the basic rate of Income Tax.

Currently, landlords are entitled to claim the top rate tax relief of up to 45% on residential buy-to-let properties, but that’s all set to dramatically change once the new rules fully kick in, as this figure will be cut to 20%, the base rate of tax.

As a result of the changes, landlords will no longer be able to deduct mortgage interest payments or any other finance-related costs from their turnover before declaring their taxable income. According to the National Landlords’ Association, the plans will also mean a significant proportion of the 440,000 basic rate tax-paying landlords will find themselves winding up in the higher rate tax bracket.

But while April 6 2017 is when we’ll see the Government start to put the wheels in motion for its plans, the full effect of the changes actually won’t be felt right away. That’s because the reduction will be implemented using a phased approach over the next three years, which will see it fully in place from April 6, 2020.

Who will the changes apply to?

UK and non-UK landlords who let residential properties as an individual, or in a partnership or trust will all be impacted, as will trustees or beneficiaries of trusts who are liable for Income Tax on their property’s profits.

For resident companies, both UK and non-UK based, and landlords of furnished holiday lettings, it’ll be business as usual. They don’t fall within the jurisdiction of the new restriction and therefore will still be able to receive relief for interest and other finance costs as they’ve always done.

Which finance costs will be restricted?

 It’s anticipated the restriction will apply to interest on mortgages, loans (including loans to buy furnishings) and overdrafts. Other affected finance costs include:

  • Alternative finance returns
  • Fees and any other incidental costs for getting or repaying mortgages or loans
  • Discounts, premiums and disguised interest

Up until April 6, 2017:

Interest is classed as a deductible expense so, if a landlord’s total expenses exceed their rental income, it creates a loss that can be carried forward and used to reduce taxable rental profit (or increase a loss) later down the line.

From April 6, 2017:

A proportion of the interest (25% for 2017/18, 50% for 2018/19, 75% for 2019/20 and 100% for 2020/21) won’t count as an expense and therefore won’t be able to be taken into account when working out a loss. It can, however, be carried forward and used as credit in later years.

 What should residential landlords be doing now?

While these changes to tax relief for residential landlords may have been widely-talked about from the moment they were unveiled in the summer Budget 2015, there appears to be some uncertainty surrounding them, even now.

For those who haven’t already done so, now’s the time to focus on fully understanding the implications of what’s proposed, planning ahead and developing a clear strategy to address the widespread impact the changes will undoubtedly have once they’re in place. For instance, while residential landlords should already be in the habit of keeping a record of their losses carried forward for their tax returns, they’ll also need to report the amount of interest carried forward for 2017/18 and onwards, as part of the new rules.

The tax relief landscape for residential landlords is set to change beyond all recognition from April 6, but there’s no reason why it shouldn’t be anything but a seamless process for those who’ve done their research and got the right professional support and insight behind them.

Got any questions or want to find out more about how the tax relief changes for residential landlords will impact you? Or perhaps you’d like advice on how to ensure you’re complying with the new rules as they’re phased in? Call us on 01905 777600 or email us at mail@ormerodrutter.co.uk.


DSC4366About the Author

David Gillies specialises in private client tax, advising on personal tax with an emphasis on inheritance tax planning, trusts, tax efficient structuring for property portfolios and residence and domicile status. He has worked for “big 4” firms as well as smaller practices.

 


 

Inheritance tax planning for farmers and agricultural land

If structured correctly, farmland potentially benefits from generous reliefs from inheritance tax. This is a complex area and HMRC examines all claims very carefully. Anyone who owns farmland for any purpose, and even working farmers, should take advice about their inheritance tax position to ensure that their affairs are in order. Taking action now with effective inheritance tax planning could protect your land from an Inheritance Tax charge of 40%.

In certain cases, subject to strict conditions and a period of ownership test, agricultural property can qualify for up to 100% inheritance tax relief. However, this only applies to the pure agricultural value of the land concerned, so any possible hope value from the possible sale for development purposes can’t qualify.

Farmland often also qualifies for inheritance tax business property relief, which may cover any hope value from redevelopment, as this is not restricted purely to the agricultural value of the land. However, the land must be part of a business activity that will be continued by the owner and strict conditions also apply to this relief.

Farmers who diversify out of farming into other activities, such as fishing and fish farming, wind farms and let cottages can potentially continue to benefit from business property relief if they meet the necessary conditions, although agricultural property relief will cease to be available.

The farmhouse must also be taken into consideration. Usually the significant element of private use of the farmhouse means that it is not eligible for relief as a business property. However, there are some cases where the farmhouse qualifies for agricultural property relief. The size and character of the farmhouse is take into consideration and again strict conditions apply.

Inheritance tax relief for farmland, business and agricultural property is a highly complex area with many aspects to take into consideration. Many land owners will want to pass the farm down to their children as they reach retirement age, and at this stage it is vital that the correct structures are put in place in order not to lose the valuable reliefs available.

There are many different options available, such as bringing the children into a farming partnership which holds the farmhouse as an asset, or gifting the land to a family trust. Each situation is different and care should be taken when choosing an appropriate course of action to ensure that the various tax reliefs are utilised effectively.


 

This article is designed to highlight some of the issues surrounding business and agricultural inheritance tax relief, and we highly recommend that you seek professional advice when considering your own situation and planning for the future.

Ormerod Rutter are specialists in inheritance tax and estate planning, with a detailed understanding of how these reliefs work. If you would like to discuss this further, please don’t hesitate to contact us and speak to David Gillies.

By continuing to use the Ormerod Rutter site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close