Gannons provides specialist tax advice to companies including in connection with the sale of shares in a company. Our expertise includes advising companies on whether the substantial shareholding exemption (which was introduced in the UK in 2002) applies in connection with a sale of shares and also on pre-transaction structuring. Subject to certain conditions discussed below, if a company has a substantial shareholding in another company it will be exempt from corporation tax in respect of any gain made when it sells its substantial shareholding in that other company. It is important to note that for the substantial shareholding exemption to apply the sale of shares must be by a company (not a partnership or an individual).
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).
The three substantial shareholding exemptions (SSE)
There are three different limbs to the substantial shareholding exemption: the main exemption and two further subsidiary exemptions.
Substantial shareholding exemption – the main exemption
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:
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.
Substantial shareholding exemption – the subsidiary exemptions
The two further subsidiary exemptions (which confusingly don’t actually refer to subsidiary companies) are as follows:
Additional substantial shareholding exemption provisions
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.