Substantial shareholding exemption made easier to claim.

The government is to amend the substantial shareholding exemption (SSE) legislation and the share reconstruction rules to avoid unintended chargeable gains being triggered where a UK company incorporates foreign branch assets in exchange for shares in an overseas company.

The SSE confers exemption from the charge to tax gains or losses accruing to companies on their disposal of shares where certain conditions are met.

The exemption was introduced for disposals on or after 1 April 2002 to make the UK a more competitive business environment. The exemption was subject to the following conditions:

  • The shareholding had to be at least 10% of the ordinary share capital, with anti-avoidance provisions to ensure the shareholding represented at least 10% of the economic rights over the company.
  • The vendor company had to be either a trading company in its own right or a member of a trading group, both for a specified period before the transaction and immediately after the disposal.
  • The company that was sold had to be either a sole trading company or the holding company of a trading group or subgroup, both before the transaction and immediately afterwards.

 Red tape reduction
For disposal on or after 1 April 2017, measures have been introduced to ease the administrative burden while still delivering on the original policy objectives.

The condition that the investing company has to be a trading company or part of a trading group has been removed.

The condition that the investment must have been held for a continuous period of at least 12 months in the two years preceding the sale has been extended to a continuous period of 12 months in the six years preceding the sale.

The condition that the company in which the shares are sold continues to be a qualifying company immediately after the sale has also been withdrawn, unless the sale is to a connected party.

For companies owned by a specific class of investors, defined as qualifying institutional investors, the measure provided for a further exemption that requires only that the substantial shareholding condition is met – the requirements in Part 3 do not apply. If at least 80% of the ordinary share capital of the company is owned directly or indirectly by one or more qualifying investors, then gains and losses of a disposal of shares will be exempt in full. Where between 25% and 80% is so owned, then a proportionate exemption is available.

The aim of the policy is to ensure that UK trading companies or groups can divest themselves of non-core trading activities without facing a capital gains tax (CGT) bill.

Article from ACCA In Practice