The Substantial Shareholding Exemption (SSE) was introduced via the 2002 UK Finance Act, with a view to removing chargeable gains arising on certain disposals made by companies from the UK corporate tax net.
What is SSE?
In broad terms, where a company (Company A) sells shares in another trading company (Company B), and Company A has held a minimum of 10% of Company B’s ordinary share capital for a period of 12 months leading into the sale, the disposal should be exempt from corporation tax charge.
Whilst the SSE provisions are, overall, fairly well understood, there have been a number of conditions that have historically caused confusion amongst advisers. Significant changes were made to simplify the rules in 2017, yet uncertainty around one particular subclause has remained.
The clause in question has the effect of extending the exemption to situations where the trade and assets subject to sale are currently housed within Company A, but there is an intention to transfer these to Company B shortly before the sale. This may be due to there being multiple trades operated from within Company A – some of which do not form part of the proposed sale transaction.
The uncertainty arises from the wording of the extension, which states that the 12-month rule will be deemed to apply to the shares that Company A holds in the newly-incorporated Company B. However, this is only if the assets transferred have been used by another group member for the entirety of the 12 months immediately preceding the transfer, and whilst it was such a member.
Some advisers took this to mean that there must have been a group in place for the whole 12-month period prior to sale. Others, on the other hand, argued that this was not the case, believing that incorporating Company B and transferring the assets down immediately prior to sale would be sufficient enough to qualify for the exemption.
Finally, some clarity
In a recent tribunal decision, the presiding judge concurred with the former interpretation, stating that, in order to satisfy the conditions to qualify for the extension, a group must have been in place for the entire 12-month period.
So, what does this mean in practice?
In real terms, this means that an individual in ownership of a standalone company that houses multiple trades may wish to consider incorporating a dormant subsidiary for at least 12 months, with a view to satisfying this particular condition in the future. This is particularly crucial if the individual deems it possible for a sale of one of these trades to take place in future.
If the individual was too late in implementing the planning, there’s always the option to ‘demerge’ the assets of the trade into a completely independent company and sell the related shares.
How we can help
PKF Smith Cooper have a number of specialist tax advisers on hand to assist you with this type of planning, each of whom has significant experience in this area and have helped many of our clients to implement similar legal structures. Please feel free to contact us if you need any advice in this area.