Substantial Shareholdings Exemption (SSE) is a valuable tax relief available to UK companies. Understanding SSE is essential to maximise the financial benefits and refine your company’s tax strategy for future transactions. Our corporate tax experts explain how it works.

What is Substantial Shareholdings Exemption?

The SSE is a tax relief that applies to companies in the UK. It exempts companies from paying corporation tax at potentially 25% of the capital gains made when they sell qualifying shares in another company, provided certain conditions are met.

This exemption also extends to pre-transaction structuring, allowing companies to plan strategically before a transaction occurs. However, it is important to note that this exemption applies explicitly to companies selling shares and does not include partnerships or individuals.

What are the criteria for SSE?

When a company sells shares in another company, it will not incur a chargeable gain for corporation tax if it fulfils certain conditions:

  • The selling company must have maintained a substantial shareholding in the other company for 12 months. This substantial shareholding is typically defined as at least 10% of the ordinary share capital. However, the calculation of this 10% involves several rules and considerations.
  • The company whose shares are being sold must be a trading company or a holding company of a trading group during the 12-month period. Occasionally, the trading condition applies not only before the sale but also immediately after the transaction.

These conditions collectively form the criteria for the SSE. Meeting these requirements will ensure you avoid paying corporation tax on gains made from the sale of shares. However, navigating tax regulations in the corporate landscape is a complex task – seeking advice from a tax advisory specialist is the most effective way to guarantee your eligibility for SSE.

Who is eligible for SSE?

To qualify for SSE, you need to have continuously owned eligible shares for a year, starting no more than six years before the day you sell them.

The company selling the shares does not have to sell all of its substantial shareholding, neither does it have to keep that shareholding at the time of the sale. However, the company must have had a substantial shareholding for a year within the past six years to qualify for SSE.

Even if you do not meet the 12-month requirement, you may still be eligible for SSE. This can happen if part of a group’s business assets is transferred to a new company.

When a buyer is only interested in buying the business assets of an existing company, not the shares, the seller can use a strategy called a hive-down. This involves creating a new subsidiary and transferring the business assets to it. The seller then sells the shares of the new subsidiary to the buyer.

SSE rules are crucial in this context. They allow the seller to check if the business was operated by another company within the same group for 12 months, which is important for planning the transaction and qualifying for SSE relief when selling the shares of the new subsidiary as long as a group relationship exists.

M Group Holdings Ltd v HMRC (2023)

In a recent tax tribunal, M Group Holdings Ltd v HMRC (2023), a company tried to sell a subsidiary that it had created less than 12 months earlier. HMRC refused to allow M Group Holdings to claim SSE because it had not owned the shares for long enough.

The company argued it should be allowed to claim SSE because it had effectively operated the business for over 12 months, but the court ruled that the law does not allow companies to ‘look through’ ownership of a trade before a group existed.

What does this mean for owners of standalone companies?

If you are the owner of a standalone company, you may find it beneficial to consider incorporating a dormant subsidiary (and create a group for these purposes) now so you can benefit from SSE in future transactions.

A ‘dormant subsidiary’ is a company that is more than 50% owned by another company, not trading or receiving any other income.

This strategic move would allow you to navigate the SSE requirements more effectively and take advantage of provisions, such as extending the holding period when another group member holds trading assets.

Creating a dormant subsidiary in a planned way can help save on taxes and make future financial transactions more tax-efficient.

How can we help?

At PKF Smith Cooper, we understand the difficulties of navigating SSE eligibility. Our expert tax team can advise you on the legal complexities of share sale transactions and make sure you are eligible to claim SSE on your future transactions. Get in touch with our corporate tax team today to find out more about our services.