Substantial Shareholding Exemption – Changes are Coming
A change to one of the key corporate tax rules in April could deliver significant value to your group tax planning.
The Government has published draft legislation widening and simplifying the Substantial Shareholding Exemption (“SSE”) which will come into force from 1 April 2017.
SSE is a generous tax relief enabling qualifying companies to sell their shares in other companies without being taxed, and the relief is about to become accessible to more companies.
Broadly, the conditions under the current legislation are:
- The shares held amount to at least 10% of the company being sold and have been held for at least 12 months in the last 2 years;
- The company selling the shares must be a trading company or a holding company of a trading group for the 12 month holding period and immediately after sale;
- The company whose shares are being sold must be a trading company or a holding company of a trading group for the 12 month holding period and immediately after sale.
The proposed new rules are coming in to make the relief even more generous which means that groups and companies that wouldn’t usually have this relief will now qualify.
The changes are summarised as follows:
- The 10% holding period can now be for any 12 month period in the last 6 years.
- The company selling the shares no longer needs to be considered to be “trading” before or after the sale.
- The company whose shares are being sold does not need to be considered to be trading after sale unless it is being sold to a connected party.
- If the selling company is owned at least 80% by institutional investors (e.g. pension schemes, charities, investment trusts, etc), any share sales will automatically qualify for SSE relief even if the company being sold isn’t trading. If less than 80% but more than 25% is owned by institutional investors then partial relief will be available.
- If the shares being sold were acquired for £5m or more then SSE will apply even if the 10% holding criteria hasn’t been met.
The changes particularly at #1, 2 and 3 above are likely to benefit to a wide range of companies.
For example, the following situations would from 1 April 2017, expect to be eligible for SSE where transactions before this date could have had a substantial tax charge:
- A company that held 25% of a product development joint venture company with 3 other shareholders where a third party made an agreement to buy 80% of the company now with an agreement to buy the final 20% in 5 years if certain conditions were met. The changes would mean the second disposal of 5% would qualify for SSE where it didn’t before.
- A holding company that holds substantial investment properties that has one trading subsidiary which it sells to a third party.
- A holding company that owns several subsidiaries that each are Special Purpose Vehicles that develop individual properties. A buyer comes along and wants to acquire the shares of one subsidiary because it intends to rent out the developed property within it to third parties.
The policy rationale is that this increases the ability of groups to fund their own investment without tax loss, though ultimately there will still be tax to pay by shareholders on their eventual dividends. Therefore, it will mainly be of benefit to simplify group restructuring or in groups where sale proceeds are intended to be reinvested within the group or selling company.
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