View the related Tax Guidance about Substantial Shareholding Exemption (SSE)
Substantial shareholding exemption (SSE) ― overview
Substantial shareholding exemption (SSE) ― overviewThe substantial shareholding exemption (SSE) provides a complete exemption from the liability to corporation tax on the gains generated from qualifying disposals of shares and interests in shares by qualifying companies. No claim is required. Provided the conditions for SSE are met, it applies automatically. Conversely, if losses are generated by the disposal and the SSE conditions are met, the losses are not allowable. There is no ability to disclaim the exemption (for example, where it would be advantageous to claim a loss).The exemption is aimed at disposals by companies of investments in trading companies, groups and subgroups.Ensuring the conditions for SSE are met is extremely important as the financial value of the exemption can be significant. Conditions are in place relating to both the investing company and the investee company. The rules are complex and, in particular, HMRC will often scrutinise the activities of the company / group / sub-group disposed of to establish whether the trading activity tests are met. The SSE regime is contained in TCGA 1992, Sch 7AC. This guidance note provides an overview of the SSE. More detailed commentary is set out in Simon’s Taxes Division D1.10. For details of the regime as it applied before 1 April 2017, please see Simon’s Taxes D1.1071.HMRC guidance can be found at CG53000P.SSE ― which disposals are exempt?There are, in effect, four separate but related exemptions within the regime.By far, the most common is the main SSE exemption relating to disposals of
Cases in which SSE applies
Cases in which SSE appliesThe commentary set out in this guidance note is based on the legislation for disposals on or after 1 April 2017. For details of the regime as it applied before this date, see Simon’s Taxes D1.1071. SSE ― the main exemptionThe substantial shareholding exemption (SSE) applies to disposals of shares and interests in shares by qualifying companies on or after 1 April 2002 and exempts gains from corporation tax in certain circumstances. Conversely if losses are generated by the disposal and the SSE conditions are met, they are not allowable.Certain requirements must be met in respect of the investee company and the shareholding itself in order for the investing company to benefit from the exemption. The key conditions are as follows:•at the time of the disposal, the investing company must have owned at least 10% of the ordinary share capital of the investee company for a continuous period of 12 months during the six years prior to the date of disposal•from the beginning of the latest period of 12 months for which the substantial shareholding condition is met until the time of the disposal, the investee company must have been a trading company or the holding company of a trading group or sub-groupThe investing company must also be entitled to:•at least 10% (or a proportionate percentage) of the profits and assets available for distribution to equity holders by the investee company•at least 10% (or a proportionate percentage) of the assets of
SSE and the trading requirement
SSE and the trading requirementSSE ― the trading conditionThe commentary set out in this guidance note covers the current substantial shareholding exemption (SSE) with specific reference to the interpretation of ‘trading’. For more detailed commentary, see Simon’s Taxes Division D1.10.What is a trading company or trading group?One of the conditions that must be satisfied by the investee company for the purposes of the SSE is that it must be a trading company or the holding company of a trading group or trading sub-group. A particular definition applies to the terms ‘trading company’, ‘trading group’ and ‘trading sub-group’. In each case, the activities of the company, group or sub-group must not include substantial amounts of non-trading activities, such as the passive holding of investments or intra-group investment activities (this is explored further below). A holding company means the principal company of the group or, in the case of a subgroup, the entity that would be the principal company of that subgroup except that it is itself a subsidiary of another company. The fact that one company holds shares in another company does not by itself normally amount to a trading activity. If the two companies are in the same group, the trading status test looks at the activities of the group as a whole. A non-trading member (which is not itself a holding company) of a trading group would not qualify, even if the group as a whole is trading. The SSE legislation defines ‘trade’ as a trade, profession or
How does SSE interact with other legislation?
How does SSE interact with other legislation?The substantial shareholdings exemption (SSE) is often just one factor to consider in the context of a transaction to sell the shares in a company. As part of the tax structuring for this type of transaction, a number of other tax-related provisions must be analysed to ensure the most tax efficient result is achieved, balanced with any commercial factors. For more in-depth commentary on SSE, see Simon’s Taxes D1.1045, D1.1061. See also the Tax implications of share sale guidance note. For a flowchart showing when SSE is available or when other legislative provisions take priority in particular transactions, see Flowchart ― SSE ― When does SSE apply with share reorganisations and intra-group asset transfers?.SSE and the degrouping chargeSSE available to exempt de-grouping chargesThe investing company and the target company may have been members of the same group for capital gains purposes, but if the investing company sells its shares in the target company, the group relationship will be broken. Assets may have been transferred between the group companies prior to the group relationship being broken on a no gain / no loss basis. However, if a company leaves the group within six years of an intra-group transfer, whilst still owning the transferred asset, a ‘degrouping’ or ‘exit’ charge would normally arise (see the Degrouping charges guidance note). Similar degrouping rules apply for assets within the intangible regime which are transferred intra-group on a tax neutral basis (see the Degrouping charges and elections ―
SSE ― anti-avoidance
SSE ― anti-avoidanceThe SSE regime contains anti-avoidance provisions which are designed to prevent abuse of the exemption. HMRC has confirmed that these anti-avoidance provisions are designed to catch very specific activities and it does not expect these provisions to be triggered very often. The legislation sets out that SSE will not apply in situations where in pursuance of arrangements entered into with the sole or main benefit being to secure an exempt gain, an untaxed gain arises within a company as a result of a disposal of shares and before the gain arose, either:•the investing company acquired control of the target company, or the same person(s) acquire ‘control’ of both companies•there has been a ‘significant change in the trading activities’ of the target company at a time when it was controlled by the investing company, or both companies were controlled by the same person or personsThese terms are explained below.For more in depth commentary on these provisions, see Simon’s Taxes D1.1050.SSE anti-avoidance ―
Inbound migration
Inbound migrationReasons for an inbound migrationMigration describes the situation when a company changes its tax residence. A company which is not incorporated in the UK may become resident for tax purposes in the UK if it becomes centrally managed and controlled in the UK.The Government is currently consulting on whether or not to introduce a corporate re-domiciliation regime. The consultation closed on 7 January 2022 and the response is expected to be published by HMRC in due course.See the Residence of companies guidance note.In many cases, this may happen accidentally, but a well-advised company will avoid this by taking appropriate action to ensure that central management and control is kept outside the UK.However, in some cases, there may be tax benefits of a company becoming resident in the UK, for example:•to take advantage of a UK double tax treaty•to avoid the application of anti-avoidance rules such as the attribution of gains under TCGA 1992, s 3 (formerly TCGA 1992, s 13) ― see the Gains attributable to participators in non-UK resident companies guidance note ― or the transfer of assets abroad rules, see Example 1•to qualify under the subsidiary substantial shareholding exemption (TCGA 1992, Sch 7AC, para 3, which requires the investing company to be resident in the UK), see the Substantial shareholding exemption (SSE) ― overview guidance note which also sets out legislative changes in this area applicable from 1 April 2017
Comparison of share sale and trade and asset sale
Comparison of share sale and trade and asset saleStructuring the sale of a businessA purchasing company can acquire a business in one of two ways, either by purchasing the trade and assets or by purchasing the shares in the company operating the business.Commercially, purchasers may prefer to buy the trade and assets. This is because they have the ability to negotiate exactly which assets are acquired, and which liabilities are left behind.Conversely, if the shares in the company are acquired, the company’s entire history is transferred to the new owner, including its liabilities. The due diligence process, which is carried out prior to completion of the acquisition, aims to identify potential liabilities and obligations, and make recommendations to the purchaser as to how to deal with them or mitigate them. This might be by way of price adjustment, underpinned by structure change, or detailed warranty and indemnity provisions in the purchase agreement. A due diligence exercise will not only look at potential tax liabilities, but also covers legal, commercial and financial matters.On the other hand, the preferred option for vendors is often a share sale. Attractive reliefs may be available, depending upon the circumstances of the individual or company making the disposal.For example, business asset disposal relief (previously known as entrepreneurs’ relief) may be available to an individual selling their shares in the company, resulting in up to £1m of capital gain being taxed at an effective rate of 10%. See the Conditions for business asset disposal relief
Demergers ― overview
Demergers ― overviewThis guidance note gives an overview of why and how companies and groups demerge, and the aims and process of tax planning for demergers.In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.Companies (and groups) may want to split out their activities for many different reasons. There may be a desire to focus management on one specific part of the business or there may be conflicting interests between shareholders. There could also be legal reasons to separate a trade out from the rest of the group (eg to ring fence liabilities). It may be the only way for a purchaser to be able to buy certain parts of the business. While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger.The different mechanisms for achieving a tax efficient demerger fall into three main categories:•statutory demerger•demerger by way of reduction of share capital (often referred to as a capital reduction demerger)•demerger by Insolvency Act 1986, s 110 demerger (also known as a liquidation demerger)For each of these demergers there are tax provisions which should mean that, for tax purposes, a qualifying distribution is exempt and as such there is no income tax for the shareholder.The decision as to which demerger mechanism to use will
Gains attributable to participators in non-UK resident companies
Gains attributable to participators in non-UK resident companiesAs part of the changes introduced by FA 2019, Sch 1, TCGA 1992, Part 1 was rewritten. The new TCGA 1992, Part 1 largely restates the existing law but also includes additional provisions to bring disposals by non-UK residents of UK land from 6 April 2019 within the charge to tax. The rewrite was intended to modernise and simplify the structure of the UK capital gains rules as well as to accommodate the rules on disposals of interests in assets relating to UK land by non-UK residents. Where the legislation has been restated, the legislative links to the previous law shown in this guidance note are for reference only. Non-resident companies are not normally liable to tax on chargeable gains even if the assets disposed of by the company are situated in the UK. The main exceptions to this are:•where the assets are used for the purposes of a trade carried on in the UK through a permanent establishment (PE), such as a branch or agency•for disposals made between 6 April 2013 and 5 April 2019, where the assets are interests in UK residential property and the whole or part of the gain is ‘ Annual Tax on Enveloped Dwellings (ATED) related’ or is within the scope of the Finance Act 2015 non-residents CGT (NRCGT) regime. See the Overview of the ATED regime and Non-resident capital gains tax (NRCGT) on UK residential property (2015–2019 rules) guidance notes for further details
Entity classification
Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:•Introduction to CFCs•Shareholder issues ― international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:•the availability of business asset disposal relief (previously known as
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