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01 March 2018

Extended scope of the substantial shareholding exemption

The substantial shareholding exemption (SSE) has been around for many years, and allows a company to sell shares in another company, with any gains tax-free.

So, how does it work? In simple terms, where one company owns more than 10% of the shares in another company and sells those shares, then it will not be subject to Corporation Tax on any gains arising on the sale of the shares, making such sales exempt.

Prior to the recent changes, for a company to qualify for the SSE, it had to meet a number of conditions, as follows:
  1. It must have held the shares for at least 12 months in the 24 months prior to the sale;
  2. It must itself be a trading company, or the holding company of a trading group for the whole of the 12 month period before and after the sale;
  3. The shares disposed of must have been in a company that was a trading company (or the holding company of a trading group) for the 12 months before and after the sale.

As a result of the recent changes, the scope of the SSE has been extended for disposals on or after 1 April 2017, as follows:

  • The 12 month ownership period in 1 above can be at any time in the 6 years prior to sale;
  • The company selling the shares no longer has to be a trading company (or the holding company of a trading group), meaning investment companies can qualify;
  • The shares disposed of no longer have to be in a company that was a trading company (or the holding company of a trading group).

The most important change here is that where a company held shares in a trading company and sold all of it's shares in that trading company, under the old rules the SSE would only apply where the holding company also had shares in other trading companies after the sale, or was itself a trading company. Otherwise they would need to liquidate the company straight after the share sale to avoid being classed as non-trading, so that they could secure the SSE. This caused issues for some simple trading groups, but the new rules are now much wider reaching and make the prospect of owning shares via a holding company even more appealing (see Tax Tip article).

Furthermore, the exemption can now be enjoyed in relation to non-trading companies which is a useful extension to this long-standing relief.

For further advice on this matter please contact me.


Key Facts:

  1. The SSE allowed companies selling shares in trading companies to do so tax-free
  2. They had to own the shares for at least 12 months for the SSE to apply
  3. Both the company selling the shares and the company the shares were in had to be trading
  4. New rules extend the scope of the SSE for disposals on or after 1 April 2017
  5. The trading requirement for the selling company and the other company no longer apply

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