Insights

POLICY ON HOLD UNTIL AFTER GENERAL ELECTION

One of the less widely publicised changes announced in the Budget 2017, but which has now been excluded from Finance Bill 2017 until after the election, relates to an important amendment to the substantial shareholding exemption (SSE) rules. Eligibility for this important corporate tax relief was due to have been expanded considerably in a move that would have been welcomed by groups of trading companies in particular. When the Chancellor says he intends to make the UK one of the best locations for companies to operate globally, policies such as this demonstrate his dedication to the cause.

What is substantial shareholding exemption tax relief?

The substantial shareholding exemption (SSE) exempts trading companies and groups from paying capital gains tax when they sell trading subsidiaries. It is a very valuable tax relief initiative but there are strict qualifying criteria to be met. For all disposals made on or after 1 April 2017, the rules are as follows:

• To qualify for the substantial shareholding period, a minimum 10% shareholding in the company’s relevant ordinary share capital (in addition to other economic rights e.g. entitlement to profits available for distribution) must have been held for a minimum of 12 months and for a maximum of 6 years prior to the disposal. This new ruling is beneficial because it enables an investment group, for example, a private equity company, to sell shares in stages over multiple years and once the total shareholding has been reduced below 10%, to dispose of any remaining shares within 12 months.

• There is no distinction between disposals of a UK resident company and an overseas company.

• Where a disposal does not involve a connected party, the investing company does not have to be a trading company or member of a trading group. This widens access to SSE and also enables a group conducting a disposal of its last trading subsidiary to qualify. In cases where the disposal is to a connected party, there is a requirement for the investee to continue trading activities immediately after the transaction to retain SSE eligibility.

Overall, these changes are positive news for corporate businesses and should be welcomed as a way to encourage overseas investment and more international group companies to base themselves in the UK. As to how effective they will be in achieving these goals, only time can tell.

If you would like to discuss SSE or any other aspect of corporate taxation in more detail, please contact partners@rjp.co.uk.