For some time the UK tax system has afforded a tax exemption – called the substantial shareholding exemption (SSE) – to provide a complete exemption from tax on profits made by corporate shareholders on the disposal of shares in trading companies.
Conditions to be met
As with all such tax reliefs there are conditions which have to be met for the relief to be available. But with SSE these requirements have always been relatively undemanding in most circumstances because SSE was introduced as an anti-avoidance provision, designed to prevent holding companies from claiming losses on the disposal of trading subsidiaries and investments. For example, the relief applies to a shareholding of as little as 10 per cent.
With intended effect from 1 April 2017, changes have been drafted to make the SSE even more attractive, reflecting the desire to make the UK more appealing as a holding company location. These changes were included in Finance Bill 2017, but were then withdrawn to ensure Finance Act 2017 made its way quickly through Parliament before the forthcoming general election. However, the Financial Secretary to the Treasury subsequently announced that a new Conservative government would include measures withdrawn from the Finance Act in a second Finance Bill later in the year, so it is not unrealistic to believe they will reappear.
Wider benefit for some
Notwithstanding the current uncertainty, a key point to note is that the intended changes may well provide a wider benefit to some entrepreneurial or family businesses that dispose of their interest in corporate businesses. This will depend to a large extent on the corporate structure adopted.
The revised SSE rules are intended to remove the previous requirements that the company making the disposal (or the group of which it is a part) satisfies a trading test for a qualifying period before and also immediately after the disposal. Other than for connected party disposals, they also remove a requirement for the company disposed of (or its subgroup) to satisfy a trading test immediately after the disposal. These rules meant that a holding company which disposed of all its trading activities could not qualify for SSE.
The changes open up the possibility that a holding company might be able to dispose of all of its trading activities with no tax liability at all. This will only be possible if there is a holding company which can be retained, but a holding company is sometimes in place already or there might be good commercial reason to introduce one.
Where all shareholders qualify for entrepreneur’s relief (ER), this might only represent a tax saving of 10 per cent, but ER is not always available and it might be attractive to families or a group of shareholders to retain the sale proceeds within a corporate environment within which (under current tax rules) dividends do not attract any tax liability (unless paid out to individual shareholders) and other income and capital gains are subject to a corporate tax rate of only 19 per cent (and set to fall further to 17 per cent by 2020).
Seeking to make use of this opportunity should be based upon careful consideration of the objectives of the shareholder group and a view of possible future tax changes, but the relaxation of the SSE requirements appears to offer added flexibility for some shareholders.
For more information please get in touch with Jim Meakin, or your usual RSM contact.