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Business Services  •  Business Tax

Qualifying for Substantial Shareholding Exemption

By RJP LLP on 26 October 2023

The substantial shareholding exemption (SSE) is tax relief that is available to companies that pay UK corporation tax. If available, it can exempt from tax capital gains that would otherwise be subject to corporation tax following a share disposal. A recent tax case highlights how claims for SSE can easily be refused if timings are not considered carefully, resulting in a significant loss of tax relief.

In this instance, the SSE claim was not allowed on disposal of shares in the subsidiary  because the holding had not been a member of a group throughout the required 12-month qualifying period. A shareholding of just one month longer would have qualified for the full relief. Here are the details:

M Group Holdings Limited (MGHL) had claimed SSE against gains arising on the disposal of shares in a wholly owned subsidiary, a sale that took place in 2016 realising a gain in excess of £53m. The holding company had hived its trade down to a wholly owned subsidiary and had then disposed of its entire shareholding in that subsidiary. If SSE had been available it would have exempted from tax the entire capital gain arising in the holding company on the share disposal. HMRC issued a closure notice refusing the claim, which was then upheld by the First Tier Tax Tribunal (FTT) and on further appeal to the Upper Tribunal (UT). The reason given by HMRC were that the holding company had not been a member of a group for a full 12 month period prior to disposal of the shares in its subsidiary. If the holding company had owned even a dormant subsidiary for a 12 month period prior to the sale it would have qualified as a group and SSE would have been available on the disposal.

The company shareholder tried various approaches before the tax tribunal. He queried the meaning of “group” and suggested a company could itself be a member of a group of one, but this was rejected, and it was confirmed that there must be more than one 51% subsidiary company for a group to exist.

In this example, had the shareholder waited one more month before the sale of shares, or had the holding company had another (even dormant) company for a 12 month period, the disposal would have qualified for SSE.

This case highlights the importance for shareholders who are interested in a trade sale or in retirement planning to take tax advice at least 12 months ahead.

If you would like tax advice for succession planning or selling your business contact us via partners@rjp.co.uk.

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