Tax Bite – Obtaining SSE on a sale of assets

The Substantial Shareholding Exemption (“SSE”) allows a company to sell shares in trading subsidiaries in which they have at least a 10% shareholding free of tax.  SSE does not, however, apply to a sale of assets.  This creates problems where a share sale cannot be achieved e.g. because the company has a number of trading divisions, some of which it wants to retain, or alternatively because the purchaser is not willing to take on all the liabilities or history of the existing company.

A practical solution is to transfer the business which is being sold down into a new company (“NewCo”).  However, in the past this often had adverse tax implications.  Firstly, for SSE to be available on a subsequent sale of NewCo it had to be held for a further 12 months.  Secondly, whilst the intragroup transfer would have been tax neutral, degrouping charges would potentially arise to NewCo when it left the group.

Legislation introduced in 2011 has alleviated some of these issues:

  1. There is now a provision which allows you to combine the period in which the hived down assets were used in the trade of a group member with the holding of the shares.  Provided the trade had already been carried on for 12 months      then as soon as the hive down occurs the SSE conditions are met and NewCo can be sold tax free.
  2. Any capital gains de-grouping charges are now applied by increasing the proceeds for  the sale of the shares.  If the sale qualifies for SSE, the de-grouping charge will form part of the non-taxable gain and therefore effectively disappear (Please note that this is not the case for post  April 2002 goodwill in respect of which a degrouping charge will still  crystallise – see below).

There are still other tax issues to bear in mind.  For example, if the business was started after 2002 then any goodwill is dealt with under the corporate intangible regime rather than under capital gains rules.  A de-grouping charge can still arise to NewCo under the intangibles rules.

We have been involved with a number of deals recently in helping to structure the sales in a tax efficient manner.  Please contact us for further details of how we can assist.

 

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