How loans can deny the Substantial Shareholding Exemption (SSE)
9th January 2026
Posted in Articles by Forbes Dawson
The Substantial Shareholding Exemption (SSE) should generally apply to disposals by companies of trading subsidiaries if the shareholding is at least 10%. To qualify, the investing company needs to have held the shares for a period of at least 12 months in the six years before the share sale and (in that 12-month period):
1. It held not less than 10% of the company’s ordinary share capital.
2. It was beneficially entitled to not less than 10% of the profits available for distribution to equity holders of the company; and
3. It would be beneficially entitled on a winding up to not less than 10% of the company’s assets available for distribution to equity holders.
Care needs to be taken in relation to the above rules around how ‘equity holders’ are identified. They are not just shareholders but can also be lenders.
Who are the equity holders?
In the context of SSE rules, an ‘equity holder’ is any person who holds ordinary shares in a company or is a loan creditor of the company in relation to a loan which is not a ‘normal commercial loan’. Therefore, it is easy to see how something that is not a ‘normal commercial loan’ could potentially scupper the availability of SSE.
Example
Investor Co Ltd owns 20% of the ordinary share capital of Borrower Co Ltd and Borrower Co Ltd has loans of £2m. If the loans are normal commercial loans, then it should be clear that the above three conditions would be met. If not, then Investor Co Ltd would need to consider conditions 2 and 3 on the basis that the lender(s) of the £2m are equity holders. This would mean that any interest or other return on the loan(s) would need to be factored into the 10% profits test. Also, the £2m would have to be factored into assets available for distribution to equity holders. If less than £2m of net assets were available to ordinary shareholders on a winding up, then it would follow that Investor Co Ltd would be entitled to less than 10% of the company’s assets on a winding up. This is because assets available to equity holders would be less than £4m and the lenders would get £2m of this, pushing Investor Co Ltd’s effective stake of all the assets available to below 10%.
This begs the question of what does not constitute a ‘normal commercial loan’. These are broadly non-standard ‘equity-type’ loans where one of the following applies:
1. The loan can be converted into shares or securities (except for shares or securities in a company’s quoted parent).
2. The interest payable under the loan is calculated by reference to the results of the company or the value of its assets.
3. The interest payable exceeds a reasonable commercial return; or
4. The lender is entitled to be repaid more than was originally lent.
Forbes Dawson view
The take home message here is that shareholders should keep abreast of any ‘funny loans’ in the companies that they invest in. Helpfully, (as mentioned above) the SSE conditions only need to met for a 12-month period occurring at any time in the six years prior to a sale and so there should generally be a reasonable chance of concluding that SSE will apply. Depending on the circumstances and commercial considerations, it may be possible to ensure an investment is ‘SSE ready’ by making adjustments to the loan structure. This will only work if the position is reviewed a year before sale, and it will not always be commercially viable to make adjustments. Generally, there is little downside (apart from a few fees) in conducting an SSE review in a timely manner before a sale.
