The Substantial Shareholding Exemption (SSE) was legislated as part of the UK Finance Act of 2002. The substantial shareholding exemption applies to companies and exempts certain gains from UK corporation tax following the disposal of shares. It can also be used to structure pre-transaction deals. This exemption, however, only applies to corporations selling shares, not to partnerships or individuals.
The SSE provisions exclude from UK tax any gains realised by trading companies and groups on the disposal of qualifying substantial shareholdings while disallowing relief for any losses. If certain precise conditions are met, the legislation takes effect automatically, subject to anti-avoidance clauses meant to prevent the legislation from being used solely to obtain a tax benefit. Gains or losses on shares held on a trading account, and the Act does not cover assets held under loan arrangements or derivatives provisions.
How SSE works
The substantial shareholding exemption legislation is pretty complicated, and several requirements must be met for the exemption to apply. When determining whether or not the exception applies, a review of the statute is highly recommended.
The rules, which were first implemented in 2002, were significantly changed and modified on April 1, 2017, making them far more -friendly. The significant change is the elimination of the requirement that the selling firm (or group) be in trade. One effect of these changes is that, with proper preparation, SSE may now be utilised effectively in the typical OMB/SME environment.
- The investing company (the seller)
- The shareholding held in the company being invested in (the target)
The company being sold (the investee company) does not need to be traded before or after the disposal, which is significantly different from the general new substantial shareholding exemption rules. It is also not necessary for the investment firm to trade before or after the disposal.
The SSE might apply whenever there is a disposal of shares, and it does not have to be on an outright sale since this guide refers to a “seller”. Liquidation of a subsidiary firm, for example, would often result in the sale of shares in that company, which the SSE may apply to.
Conditions Relating to The Target
The target must be a “qualifying company” from the beginning of the most recent 12-month period considered to determine whether the shareholding condition applies.
If the target is a trading firm or the holding company of a trading group, it is a qualified company. A trading company engages in trade operations and does not engage in non-trading activities “to a substantial extent.” HMRC defines’ substantial’ for these purposes as more than 20%. However, it has stated that it would evaluate the facts and circumstances of each case when evaluating whether a corporation engages in non-trading activities to a substantial extent.
On the other hand, a trading group is a group in which one or more members engage in trading activities, and the actions of all members of the group, when added together, yield a profit.
New Updates in UK Substantial Shareholdings Exemption (SSE) Regulations
The rules are extensive, and anything beyond a brief overview to establish the introduction is beyond the scope of this article:
- The legislation distinguishes between the investing company, which makes the disposal, and the investee company, whose stock is being sold.
- A substantial shareholding is defined as owning at least 10% of the ordinary share capital, 10% of the earnings for distribution to equity holders, or being entitled to 10% of the assets in the event of a liquidation.
- For a period of 12-month, the investment company must have the applicable qualifying shareholding.
- Even though the12 months of ownership are usually the most important, changes made in 2017 increased the actual holding time from any 12 months period in the two years leading up to the date of sale to six years. This is especially useful when there is a time limit on the amount of money you may earn.
- In 2017, a further amendment removed the requirement that the investment business be a trading company
- A reform made in 2017 abolished the need that the investee firm be a trading company immediately after disposal, which may present complications if the purchaser promptly completely cut up the trade the off. Where the disposal is to a linked person or the trade has been transferred within the last 12 months, the requirement still applies.
- The investing company’s 12-month holding term is extended to encompass any time within the group company’s final 12-month asset holding period.
- Other factors, such as the seller’s holding term, may be significant in some cases. For example, the seller’s holding period may be able to be extended if:
- The target is carrying on a trade that was previously carried out by the seller or another member of the seller’s group.
There is tax relief if the main exemption requirements are met and a sale of assets is “connected” to shares. An asset is “related” to a company’s shares if it is one of the following:
- Option to purchase or sell that company’s stock. Or
- A security that enables the holder to purchase or sell shares in a firm.
- When the primary exemption criteria were previously met but not satisfied at the time of sale, both shares and related assets are sold. The exemption applies if a sale that qualified for the primary exemption occurred during the preceding two years.
As a result, when the business has one or more trading operations, preparing for the pre-sale packaging of the trading activities utilising newco (s) as a clean (and hence more appealing) vehicle to enable them to be sold without the seller company incurring a tax charge is conceivable.
SSE and degrouping charges
A degrouping fee may be triggered if a corporation leaves a capital gains group with an asset transferred to another group member within the preceding six years. The degrouping charge increases the seller’s selling consideration for the subsidiary. As a result, any capital gains degrouping charge will also be exempted if the sale of a trade subsidiary firm qualifies for SSE.
These amendments and updates are unlikely to be of much use. It might be helpful in a circumstance when there is an earnout (say, over three years) with unknown consideration. Any value obtained above and beyond the initially valued entitlement to the unascertainable consideration would not qualify for SSE in normal circumstances.
Using the amendments above, it should be viable to keep a portion of the firm being sold, with a put option to sell it at a specific price in three years. The additional consideration received in three years would now be considered SSE since the seller would have satisfied the SSE requirements during the previous six years. However, a larger exemption will be available for companies owned by qualified institutional investors. Many clients are unlikely to be affected also.
Bloom Financials and SSE
This change is positive and should help the government achieve its goal to boost the UK’s competitiveness as a hub for holding companies. It should make the investment in Intellectual Property firms and other comparable investment companies more appealing, as they would not have previously gotten a tax exemption on disposal.
SSE does not have a claim mechanism, and the exemption is automatic if the prerequisites are met. There is no way to refuse the exemption. Nonetheless, it will be critical for businesses to ensure that the SSE’s requirements are followed in order to optimise their company tax profile and reduce the possibility of unanticipated corporation tax payments. Don’t hesitate to contact us at Bloom Financials for further information, guidance, and advice concerning tax planning, reliefs and SSE.