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 firstname.lastname@example.org.
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.