Substantial shareholding exemption

The substantial shareholding exemption (SSE) may apply where a company sells a substantial shareholding in another company. If the relevant conditions are met, the selling company may be exempt from corporation tax on the gain.

The SSE can also be relevant when structuring a transaction in advance. However, it applies to companies disposing of shares, not to individuals or partnerships.

The legislation governing the SSE is complex. We provide specialist legal and tax advice on share sale transactions, including whether the exemption may apply.

Substantial shareholding exemption – the main exemption

A gain on a company’s disposal of shares in another company may be exempt from corporation tax if the relevant conditions are met, including:

• Substantial shareholding: The selling company must generally have held at least 10% of the ordinary share capital in the company being sold for the required period. Specific rules apply when calculating the shareholding.
• Selling company: The selling company must generally be a trading company or a member of a trading group during the relevant period. The exemption is not generally available to investment companies, and the trading requirement may also apply immediately after the sale.
• Company being sold: The company whose shares are being sold must generally be a trading company or the holding company of a trading group during the relevant period. The trading requirement may also apply immediately after the sale.

The applicable time period for the substantial shareholding exemption

The substantial shareholding requirement must generally have been met continuously for at least 12 months within the six years before the disposal, subject to the applicable statutory conditions.

The exemption may also be available in certain circumstances where the 12-month requirement is not met, including some cases involving the transfer of a group’s trading activities to a new company.

The selling company does not have to dispose of its entire shareholding or still hold a substantial shareholding at the date of sale, provided the relevant conditions have been satisfied. Anti-avoidance provisions may also affect whether the exemption applies.

Additional substantial shareholding exemption provisions

Specific provisions apply to group companies and corporate reorganisations. For example:

• In certain circumstances, shareholdings held by members of a group may be taken into account when assessing whether the substantial shareholding requirement is met.
• Where a corporate reorganisation involves a share-for-share exchange, previous shareholdings may be relevant when determining whether the exemption applies.

Can we help?

The SSE is a complex and technical area. We can advise on the relevant conditions and help businesses assess whether the exemption may apply to a proposed share sale or corporate reorganisation. Please contact us to discuss how we can help.