Substantial shareholding exemption (SSE) is available to companies disposing of shares in another company, so long as a number of requirements are met. A number of changes are included in the latest Finance Bill that take effect from 1 April 2017, which provide a number of relaxations from the rules applying up to that date (“the old rules”).
Under the old rules, a disposal of shares was exempt from corporation tax on any gain so long as a number of requirements were met:
- A substantial shareholding is 10% or more which had to be held for a twelve month period falling within the two years up to the date of disposal (the paragraph 7 requirement).
- The investing company had to be a trading company or the holding company of a trading group for the whole of the twelve month period referred to in the paragraph 7 requirement, and immediately after the disposal of shares.
- The company invested in had to be a trading company or the holding company of a trading group or subgroup for the twelve month period referred to in the paragraph 7 requirement and immediately after the sale.
With effect from 1 April 2017 the above rules will be changed as follows:
- A company will have a substantial shareholding if it has a 10% shareholding in another company for a twelve month period falling within a six year period up to the date of disposal. This will give greater flexibility for piecemeal disposals of shares.
- The requirements in relation to the investing company are being repealed, so that it no longer matters what the investing company does. An investment company will not be excluded from being able to claim SSE.
- In most circumstances, the company invested in will not have to be a trading company or the holding company of a trading group or subgroup immediately after the disposal. This is a useful relaxation, as the vendor no longer needs to ensure that the purchaser does not cease the trade immediately on acquisition. This used to require specific purchaser warranties in the SPA. Where the shares are sold to a connected person, or the trade had been transferred into the company being sold within twelve months before the sale, the old trading requirement post-sale will continue to apply.
These changes mean that more situations will arise where SSE would be available on a disposal of shares by a company. For example, a holding company with a single subsidiary could sell that subsidiary and claim SSE. Under the old rules, SSE would have been available in this situation only if the holding company was wound up as soon as reasonably practicable. As a result, the proceeds could be reinvested at corporate level, rather than the shareholders having to pay CGT (or possibly income tax if the TAAR applies) following the disposal of the subsidiary and the winding up of the holding company.
Also, an investment company with a trading subsidiary may be able to claim SSE on disposal of the subsidiary. This may be useful if, for example, the holding company owns the premises from which the subsidiary trades, and the shareholders wished to keep the property but sell the trade. The holding company could simply sell the shares in the subsidiary and claim SSE, and keep the property.
The new SSE rules could also be used as part of a reorganisation where investment properties could be separated from a trade, enabling the trading company to be sold, leaving the investment activities intact. SSE should be available on the disposal of the trading subsidiary.