The conditions that must be satisfied for a company to qualify for the substantial shareholding exemption are complicated and we would recommend that specialist tax advice be obtained when interpreting the applicability of the exemption. We have however provided an overview below of the key provisions in the legislation (Schedule 7AC to the Taxation of Chargeable Gains Act 1992).
There are three different limbs to the substantial shareholding exemption: the main exemption and two further subsidiary exemptions.
When a company disposes of shares in another company it is not a chargeable gain for the purposes of corporation tax if the following conditions are met:
a) The company disposing of the shares has owned a substantial shareholding in the other company for the requisite time period. The substantial shareholding requirement is generally speaking 10% of the ordinary share capital however a number of rules apply in calculating the 10% which we can advise you on.
b) The company disposing of the shares is a sole trading company or a member of a trading group for the requisite time period. The exemption does not apply to investment companies. The trading requirement is also applicable in respect of the period immediately after the sale.
c) The company in which the shares are held is also a trading company or a holding company of a trading group during the requisite time period. The trading requirement is also applicable in respect of the period immediately after the sale.
The applicable time period for which the shares must have been held (and for which both the company disposing of the shares and company in which the shares are held are trading companies) is a continuous period of 12 months commencing not more than 2 years before the day on which the shares are sold.
The exemption may also apply even if the 12 month period has not been satisfied where part of a group’s trading assets have been transferred to a new company.
The company disposing of the shares is not required to sell its full substantial shareholding to benefit from the SSE nor is it required to hold a substantial shareholding at the time of the sale (provided that it held the substantial shareholding for a 12 month period within the 2 years).
It is worth noting that the main exemption is subject to certain anti-avoidance provisions.
The two further subsidiary exemptions (which confusingly don’t actually refer to subsidiary companies) are as follows:
a) Where the main exemption conditions are satisfied and there is a sale of assets related to shares then there will be tax relief available. An asset would be deemed to be related to shares in a company if it is an option to buy or sell shares in that company or a security pursuant to which the holder of the security may buy or sell shares in the that company or an option to buy or sell shares in that company.
b) Where the main exemption conditions were previously satisfied (but are not so satisfied at the time of sale) and there is a sale of both shares and related assets. In this situation, for the exemption to apply a sale within the previous 2 years must have qualified for the main exemption.
There are also specific provisions with regards to group companies and corporate reorganisations in relation to SSE which Gannons has significant experience in advising on. For example, it is possible in certain circumstances to collate the shares held by other members of a company’s group when determining if the substantial shareholding requirement has been satisfied. In addition, where there is a corporate reorganisation of a company’s shares (for example in a share for share exchange) the SSE can take precedence and the old shares can be referred to when establishing if the SSE qualification criteria have been satisfied.