The substantial shareholdings exemption (SSE) allows some companies to sell their shareholdings in trading companies tax free, provided a number of conditions are satisfied. This means that companies can react to market conditions and sell off parts of their business that are no longer core, releasing tax free returns for reinvestment.
Although this relief has been available for some years now, there are still circumstances where it is not available or where it is unclear whether the relief will apply. Changes being put forward in Finance (No. 2) Act 2017 will expand the scope of the relief and it is expected these will apply to share sales on or after 1 April 2017.
The SSE exemption currently applies where:
(1) there is a share sale by an investing company
(2) which is either trading or the holding company of a trading group
(3) of a shareholding of 10% or more in a trading company
(4) held for at least 12 months in the 2 years ending with the date of sale
(5) and both investor and investee continue to trade after the sale.
There is a further circumstance where SSE will apply, where a holding company sells its only trading subsidiary and is then wound up as soon as possible afterwards and has otherwise met the conditions above.
These rules will continue to apply for SSE for share sales prior to 1 April 2017.
For post-31 March 2017 disposals, the time period within which the SSE requirement must be satisfied will be increased to six years instead of two, the investing company will no longer need to be trading and there will usually be no need for the company being sold to be trading immediately after the sale.
These changes should mean many more companies and groups can benefit from selling shareholdings surplus to their needs without suffering corporation tax on any profit . This will encourage restructuring to meet current business needs with the potential for investing in businesses more relevant to their future.
The substantial shareholding exemption (SSE) can be a powerful relief from chargeable gains for corporate taxpayers but there are circumstances where it has not always been clear whether the qualifying conditions are met, explains Paul Davies, tax specialist writer at CCH