The new improved Substantial Shareholdings Exemption
12th January 2018
Posted in Articles, Business Tax, Corporation Tax, Featured Articles by Forbes Dawson
The Substantial Shareholdings Exemption (‘SSE’) was introduced in 2002 as part of the government’s drive to make the UK a better place to do business. With SSE, a company can dispose of shares in a trading subsidiary – in which it has held at least a 10% stake for a full 12 months within the past two years – without incurring a tax charge. Despite various nonsense from Margaret Hodge about this amounting to more big company avoidance (in which she clearly forgot about voting to introduce the measure!), the broad principles of SSE are sound, as usually the shareholders will suffer tax on an ultimate extraction of the disposal proceeds. Furthermore, under the original SSE rules, it was a requirement that if the holding company (and any remaining subsidiaries) did not qualify as a trading company/group after the disposal then Holdco would need to be wound up in order for the relief to apply.
A new dawn
However, from 1 April 2017 the requirements relating to the investor company have been significantly relaxed in two respects:
- Firstly, the 12 month period in which the investing company needs to have held a 10% or greater shareholding is now anytime within a six year period rather than a two year period prior to the disposal.
- Secondly, the requirement that the investing company be either a trading company or member of a trading group after the disposal has been removed entirely.
It is this second change which makes the SSE into an extremely valuable relief, and widens its applicability in a number of scenarios. In particular:
- A group which carries on a mixture of trading and investment activities through different companies can now be sure of obtaining SSE on a disposal of a qualifying trading subsidiary, regardless of the level of investment activity undertaken elsewhere in the group;
- There is no longer an issue with a group selling off one of its trading company and holding a large amount of cash proceeds (previously, this was at risk of being viewed as a non-trade asset which could taint the group’s status);
- It is no longer a requirement for a parent company to be wound up in order to obtain SSE.
The final point above is very useful to note for business owners who wish to sell their company but reinvest the proceeds through a corporate structure. Whilst in most instances the advice will be to liquidate in order to obtain the benefit of 10% Entrepreneurs’ Relief, a client who has no need to extract capital, or indeed has exhausted their £10m lifetime allowance may benefit from the deferral that SSE offers. Consequently, we expect to see a lot more holding company structures going forward. No doubt Margaret Hodge will continue to grumble, but in our view these are very sensible (and welcome) changes.
