Amending the substantial shareholdings exemption
07 December 2016
Please note: the tax proposals described below may not now take effect from the date stated – read more on the tax changes dropped from Finance Bill 2017 as a result of the snap General Election.
Fifteen years on from its original introduction, draft Finance Bill 2017 proposes a number of amendments to the substantial shareholdings exemption (SSE) designed to make it simpler to operate and ensure the UK remains fully competitive with other holding company jurisdictions. In summary, these are:
- Removal of the investor company trading condition in its entirety. This is particularly helpful for reorganising UK subgroups of a foreign owned group, as the UK investor company may not have ready access to information about the wider group necessary to meet the old condition. It should also enable property groups to benefit from SSE when selling off development activities. Importantly, there will no longer be a need for a seller to demonstrate a speedy winding up in order to qualify for the subsidiary exemption and few will mourn the loss of the dreadfully convoluted paragraph 3(3) of that same provision.
- Removal of investee company post-sale trading condition unless purchaser is a connected party. Once again this change is a simplification measure which acknowledges that the existing requirement was often not under the seller’s control.
- Extends the 10% minimum holding period to any 12 month period in the 6 years prior to disposal. This proposed extension of the holding period will introduce greater flexibility and at its extreme allows a seller who is reducing their holding in tranches to hold onto a less than 10% stake for up to 5 years whilst still benefitting from SSE on sale of the final tranche.
- A broader exemption for companies owned by qualifying institutional investors (QIIs), such as pension funds, sovereign wealth funds, charities and certain UK investment funds. This will remove the trading condition for the investee company as well, opening up the relief to property investment for the first time. It is designed to provide an exemption where investors would have been exempt from UK tax had they invested directly rather than indirectly through a UK holding company. The full exemption is available where at least 80% of the investor company is owned by QIIs, with a proportional exemption where the QII holding percentage is between 25-80%. Furthermore, the exemption is extended to cover disposals where the UK holding company owns a sub-10% stake at a cost of more than £50 million.
UK groups or sub-groups should benefit from a broader and simpler exemption for any corporate restructurings or share disposals undertaken from April 2017 onwards. Those not currently within the exemption should consider whether any proposed disposal could be deferred until the new law is effective in order to benefit from the new rules.
read more on the finance bill