Say a company has a substantial shareholding in another company, and sells its substantial shareholding. Then, the company can be exempt from corporation tax on any gain made on its shareholding.
The substantial shareholding exemption was introduced in the 2002 UK Finance Act. It can also apply to pre-transaction structuring. However, this exemption only applies to companies selling shares, not partnerships or individuals.
Unfortunately the legislation – Schedule 7AC to the Taxation of Chargeable Gains Act 1992, is complicated. We would want to review your transactions’ details. Our summary below is a simplified, laymans’ guide to what transactions qualify for the substantial shareholding exemption.
The three substantial shareholding exemptions (SSE)
There are three limbs to the substantial shareholding exemption: the main exemption and two 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 company disposing of the shares has owned a substantial shareholding in the other company for the requisite time period. The substantial shareholding requirement is usually 10% of the ordinary share capital. However, many rules apply in calculating the 10%.
- 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 also applies to the period immediately after the sale.
- 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 the substantial shareholding exemption
To qualify, the shares must have been held for 12 months, continuously, commencing not more than 2 years before the day on which the shares are sold. In addition, the company disposing of the shares, and the company in which the share are held, must be trading companies.
The exemption may apply if the 12 month period is not satisfied. One case is where part of a group’s trading assets was transferred to a new company.
The company disposing of the shares doesn’t have to sell its entire substantial shareholding. Nor must it hold a substantial shareholding at the time of the sale. However, it must have held the substantial shareholding for a 12 month period within the previous 2 years.
Note the main exemption includes many anti tax-avoidance provisions.
Substantial shareholding exemption – the subsidiary exemptions
Two further subsidiary exemptions, which don’t refer to subsidiary companies, are as follows:
- There is tax relief if the main exemption conditions are satisfied, and there is a sale of assets “related” to shares. Here, an asset is “related” to a company’s shares if it is an:
- Option to buy or sell shares in that company or
- A security pursuant to which the security holder may buy or sell shares in that company.
- Where the main exemption conditions were previously satisfied, but not satisfied at the time of sale, but there is a sale of both shares and related assets. Here, the exemption applies if there was a sale within the previous 2 years that qualified for the main exemption.
Additional substantial shareholding exemption provisions
There are also specific provisions with regards to group companies and corporate reorganisations. For example:
- Sometimes, it’s possible to collate the shares held by a company’s group members, to satisfy the substantial shareholding requirement.
- Where there is a corporate reorganisation of a company’s shares, e.g. a share for share exchange, the substantial shareholding exemption could take precedence. We could refer to the old shares to demonstrate you qualify for the substantial shareholding exemption.