What is the substantial shareholding exemption (SSE)?
When a company within the charge to Corporation Tax disposes of shareholdings it holds in other companies, usually this gives rise to a chargeable gain subject to corporation tax or a capital loss which can be available for offset against other chargeable gains.
However, there is an exemption to this rule where the chargeable gain on the disposal of a qualifying shareholding is exempt from corporation tax. Similarly, a capital loss arising on the disposal of a qualifying shareholding, is not available for use against other chargeable gains.
This is called the Substantial Shareholding Exemption (SSE)
How does a company meet the Substantial Shareholding Exemption and what is a qualifying shareholding?
The company disposing of the shareholding (investing company) must have held a “substantial shareholding” in the investee company for a period of 12 months within the 6 years that fall before the date of the disposal of the shares.
A shareholding is a “substantial shareholding” when at least 10% of the ordinary share capital of the investee company is held by the investing company. The investing company must also be beneficially entitled to at least 10% of the following in the investee company:
- Profits available for distribution to equity holders,
- Assets available for distribution to equity holders on a winding up
Are there any conditions to be met by the investing company’s business activities?
No, there are no conditions that have to be met by the investing company relating to their business status.
Are there any conditions to be met by the investee company?
Yes, the investee company must have been a trading company for a period of 12 months up to the date of the disposal of the shares, this includes periods that the trade was carried on elsewhere in the same group.
The investee company must also be trading immediately after the disposal, if the following two situations apply:
- The disposal of the shares is to a person connected with the investing company.
i.e investing company controls another company or vice versa or both are under the control of the same company.
- SSE is deemed to have been met only because a trading asset has been hived down into the investee company within the previous 12 months, and at the time of that transfer, the investing company, the investee company and the company which transferred the trading asset were all in the same group.
The company can also be a holding company of trading group or sub group for the purpose of the above conditions. i.e it controls companies that are trading themselves while the company itself is a holding company.
What is the secondary subsidiary exemption?
SSE will also be available on a share sale in the situation where the disposal would have qualified for the main exemption had the shares been sold at any point in the prior two years.
What is a trading company?
As mentioned, the investee company must be a trading company for the time period above to satisfy the Substantial Shareholding Exemption.
A trading company is generally a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities.
In practice, HMRC consider substantial to mean no more than 20% and to determine whether a company has more than 20% of non-trading activities, the following factors are taken into account:
- Turnover – is more than 20% of the total company’s turnover generally non-trading income?
- Balance sheet – is the value of the company’s assets include more than 20% of assets that are non-trading assets?
- Directors’ time – is more than 20% of the directors’ time or proportion of their expenses spent on non-trading activities?
The legislation is focused on activities, so the above factors are just evidence of those activities. It therefore does not mean that if more than 20% of a company’s balance sheet is made up of passive investments for example, that the company would be considered non-trading; the situation has to be considered in the round. Advance clearances can be applied for to HMRC to see if they agree the SSE conditions are met.
If you would lke to speak to a member of our tax team or have any questions on substantial shareholding exepmtions please contact us or telephone us on 020 7870 9050.
