The substantial shareholding exemption in a nutshell
The substantial shareholding exemption (SSE) exempts from the charge to tax gains or losses accruing on the disposal by companies of shares where certain conditions are met.
This overview provides a summary of the exemption together with brief details of the qualifying conditions.
Which disposals are exempt?
There are, in effect, four separate but related exemptions within the regime.
By far the most common is the main SSE exemption relating to disposals of shares and interests in shares.
There are two subsidiary exemptions which deal with particular circumstances where the main exemption would not apply. The first of these applies to gains on assets related to shares (for example, options over shares). The second covers gains on disposals of shares, interests in shares or assets related to shares where certain conditions for the main exemption are not met at the time of the disposal but all the conditions were met previously.
The final exemption, which was introduced from 1 April 2017, broadly applies to disposals of shares in non-trading companies where the vendor company is partly owned by qualifying institutional investors, such as pension schemes.
What are the qualifying conditions for the main SSE exemption?
There are two conditions which must be satisfied for the main SSE exemption to apply. They are as follows:
- The substantial shareholding requirement
- The trading requirement for the company whose shares are being disposed of (the investee company)
What is the substantial shareholding requirement?
Substantial means that the investing company held at least 10% of its ordinary share capital, profits available for distribution and assets available for distribution on the event of a winding up. The investor company does not necessarily need to be disposing of a 10% shareholding to qualify for SSE on the disposal, it just needs to ensure that it has held 10% of the shares.
Shareholdings by other group companies can be aggregated, so that a company selling, say, a 5% shareholding of another company will qualify for the SSE if other companies in the same group as the seller own at least another 5%.
How long does the substantial shareholding have to be held?
The exemption is dependent on the investing company having held a substantial shareholding in the investee company throughout a 12 month period starting no more than six years prior to the disposal (two years for disposals made before 1 April 2017). The six-year time limit allows subsequent disposals out of what was once a substantial shareholding to continue to qualify, despite the fact that the 10% threshold has ceased to be satisfied.
Again, shareholdings within a group can be aggregated over time, so that if one group company owns shares for six months, and then transfers them to another group company that sells them six months later, then the combined 12-month holding period means that the exemption should be available.
What type of company does the investing company have to be?
Any type of investing company – trading or investment – can qualify for the main SSE exemption on a disposal, provided the other conditions for the exemption are satisfied. Prior to 1 April 2017, stricter conditions applied and SSE was only available where the company making the disposal was a trading company or a member of a trading group.
What is the trading requirement for the investee company?
The investee company (ie the company whose shares are being sold) must be a trading company or the holding company of a trading group or subgroup to qualify for the main SSE exemption. This condition needs to be met throughout the period beginning with the start of the latest 12 month period in which the company held a substantial shareholding test and ending with the time of the disposal.
This trading condition must also be met immediately after the disposal in certain circumstances, including where the disposal is to a connected person.
What is a trading company or trading group?
A trading company cannot carry on, to any substantial extent, activities that are not trading activities. It is generally accepted by HMRC that this means at least 80% of the company’s activities must be trading in nature. Determining the trading status for the company depends on all the underlying circumstances in each case including turnover, the asset base, expenses of the company and where the directors’ time is spent.
A trading group is assessed on a broadly similar basis - the activities of the group members taken together must not include a substantial amount of non-trading activities.
What is the interaction between SSE and degrouping charges?
If a company leaves a capital gains group holding an asset that was transferred to it within the previous six years from another group member, a degrouping charge may be triggered. The degrouping charge is added to the seller's sale consideration for the disposal of the subsidiary. As a result, if the sale of a trading subsidiary company qualifies for SSE, any capital gains degrouping charge will also attract the exemption.
Does SSE have to be claimed?
There is no claim mechanism for SSE. If the conditions are satisfied, the exemption is automatic. There is no ability to disclaim the exemption.