Can a company holding alphabet shares benefit from the Substantial Shareholdings Exemption (SSE)?
22nd December 2025
Posted in Articles, Business Tax by Andrew Marr
The issue
The Substantial Shareholding Exemption (SSE) can be a valuable relief when a company sells shares in a trading company (which I will refer to as “target”). If certain conditions are met, then any gain in respect of the share disposal is not subject to tax. Otherwise, it would be taxable at 25%, so the stakes are high.
The main conditions for sellers are as follows:
- They must hold an interest of at least 10% of the target’s ordinary share capital;
- They must be beneficially entitled to at least 10% of the profits available for distribution to ordinary shareholders as well as certain loan note holders; and
- On a winding up, they must be beneficially entitled to at least 10% of the assets of the target available for distribution to such ordinary shareholders and certain loan note holders.
- The above interests must be held throughout a 12-month period beginning not more than six years before the disposal of the relevant shares in target.
Furthermore, from the start of the latest 12-month period that is used for the purposes of determining whether the shareholding condition applies (above), the target must be a “qualifying company”. This will be the case if it is a trading company or the holding company of a trading group.
Beneficial entitlement to 10% of the profits available for distribution
A 100% parent will clearly be entitled to 10% of profits available for distribution, as will the holder of 50% of shares where there is only one class of shares. This question gets more tricky when there are different classes of shares, with each class of shares having dividends voted at the discretion of directors. There is a school of thought that in this scenario none of the shareholders have any beneficial entitlement to profits available for distribution. This is on the basis that in any given year, it would be possible for any profits to be distributed to only one class of shares, to the exclusion of the others.
This is probably not the intention behind the SSE legislation and applying a purposive approach would arguably force a methodology which allocates a ‘beneficial entitlement’ between shareholders in an equitable manner. Such an argument is supported by similar issues which used to arise in the Entrepreneurs’ Relief legislation before it was changed.
Forbes Dawson view
In order to avoid difficult tax questions on a disposal, it would make sense for companies to structure their shareholdings (where commercially feasible) so that the articles clearly state that particular classes will be entitled to at least 10% of any distributable profits. Otherwise, difficult questions around ‘constructive entitlement’ will become relevant.
For example, if a company shareholder has the power (through whatever means of control) to procure that it will receive 10% of distributions then is that enough to constitute beneficial entitlement? Anecdotally, I have heard views from various tax counsels that this is not an area that HMRC are specifically seeking to attack and there is considerable doubt over whether they could successfully argue this point. For example, is it reasonable and in line with the objective of the legislation to accept that there can theoretically be a position where there are no beneficial rights to profits available for distribution? If it was in HMRC’s interests to argue that a company had over 10% beneficial entitlement, would they accept that this could be overturned by the existence of a 1% B shareholder? I would suggest that this is unlikely but still think that it makes sense to put the matter beyond doubt.
