Substantial shareholding exemption

The substantial shareholding exemption may apply where a company has a substantial shareholding in another company, and sells that substantial shareholding. The selling company, subject to fitting the conditions, may be exempt from corporation tax on the gain.

The substantial shareholding exemption can also apply to pre-transaction structuring. However, this exemption only applies to companies selling shares, not partnerships or individuals.

The legislation which applies to Substantial Shareholding Exemptions is complicated. We offer specialist legal and tax advice, meaning our lawyers can advise and represent you not only on the legal aspects of a share sale transaction but also whether you are eligible for the substantial shareholding exemption.

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.

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.

Can we help?

As the above demonstrates, this is a complex and technical area. Please do get in contact to discuss how we can help you.