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Proposed Reform of the Substantial Shareholdings Exemption

Proposed reform of the substantial shareholdings exemption

What is Substantial Shareholdings Exemption?

The Substantial Shareholdings Exemption ("SSE") provides UK Companies with an exemption from corporation tax for gains made on certain share disposals. Whilst there are certain so-called subsidiary exemptions, in its most basic form, for SSE to apply three requirements have to be met:

  • Company A must have held a substantial shareholding in Company B for a continuous period of 12 months in the 2 years prior to the disposal of shares. This is known as the qualifying period.

           Company A is considered to have held a substantial shareholding in Company B if:

        • it holds at least 10% of Company B's "ordinary share capital";

        • it is entitled to at least 10% of profit available for distribution to Company B's "equity holders"; and

        • on Company B's winding up, it would be beneficially entitled to at least 10% of the assets available for distribution to equity holders;

  • Company A must have been a trading company or, if part of a group, a member of a trading group, throughout the qualifying period and immediately after the disposal of shares; and

  • Company B must have been a trading company or, if part of a group, a holding company of a trading sub-group, throughout the qualifying period and immediately after the disposal.

Why are Reforms needed?

As promised in the Business Tax Roadmap published at Budget 2016, on 26 May 2016, HM Treasury published a consultation paper detailing possible reform of the SSE. The rationale behind initiating such reform is an acknowledgment that the 10% holding requirement (owned for at least 12 months in the two years before disposal of shares) and the qualifying trading definitions mean that SSE is no longer competitive with similar participation exemptions available in other jurisdictions. There is also a concern that the complex nature of the current regime could create administrative burdens for businesses and deter groups from locating their holding companies in the UK.

HM Treasury similarly recognises that the SSE has failed to keep up with fundamental changes to the domestic and international tax landscapes since it was first introduced in 2002, and many of its provisions may be seen as lacking simplicity and coherence. There are also concerns about the potential for its application to be uncertain or dependent on factors outside a company’s control. In the present environment, any measure to enhance the attractiveness of the UK to inward investment is to be welcomed.

Main proposed Reform Options

The consultation is at a very early stage, with HM Treasury seeking evidence to justify any substantive changes to the SSE. The main proposed reform options are as follows:

  • Development of a more comprehensive exemption for gains on share disposals to bring the SSE more in line with other countries' corporate tax systems. This will still be subject to the following parameters:

        • the exemption should not be available where the gain on a share disposal reflects the ordinary trading course of a business;

        • the exemption should, as far as possible, be confined to gains that result from effectively taxed income;

        • the exemption should not create scope for the tax-free transfer of enveloped passive assets; and

        • there should continue to be symmetry between capital gains and capital losses i.e. capital losses realised on the sale of qualifying shareholdings should not be allowable for corporation tax purposes.

          The above parameters are designed to deal with risks of potential abuse of the SSE provisions.

  • Removing the requirement that the company making the disposal be part of a trading group. This would represent a significant simplification of the SSE. It would also mean that the exemption is available whenever a trading company or sub-group is disposed of, even where the disposal is made by an investment company or a company within a group that is substantially non-trading. If made, this change would prevent the illogical position that a holding company cannot get SSE on the sale of its last trading subsidiary.

  • Establishing alternative conditions at the investee level, for example requiring the company or sub-group being disposed of to be either trading or actively conducting business activities other than trading or be carrying on a business. The aim of these conditions at the investee level is to provide more targeted protection against abuse and preventing the conditions from impacting on the SSE’s wider availability.  

  • Applying the trading tests to only the companies involved in the transaction, rather than at a group or sub-group level. This would help ensure that the availability of the SSE is not contingent on factors outside of a UK company's control. Alternatively, the tests would still apply at a group or sub-group level but the definition of qualifying activities would be extended (for example, exclude only non-trading or passive activities). Whilst the danger with this proposal is that it becomes a distinction without a difference, it is true that verifying that a company (or worse, and more often, a group) meets the trading test can at the margins be very complex and burdensome. We would support simplification here.

  • Changing the requirement that a company hold at least 10% of a company's ordinary share capital, by lowering this threshold. It will be interesting to see the responses to the Consultation on these issues. In our experience, and particularly of course in the context of holding companies, the 10% ordinary capital text is rarely problematic.


Responses to the consultation document are requested by 18 August 2016. The consultation suggests that changes may be legislated in the Finance Act 2017. Here is a link to the Consultation.

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