International Tax Alert - December 2016

December 2016

United Kingdom announces reform of the substantial shareholdings exemption

Summary

As part of the Autumn Statement issued on November 23, 2016, the UK government announced that it would be reforming the substantial shareholdings exemption (“SSE”) in response to consultation with businesses launched in May this year.
 
In the response document issued on December 5, 2016, the government announced several changes to the mechanics of the capital gains tax exemption on shares, which should make the rules easier to apply and provide businesses with more certainty over their application.
 

Background

The UK’s capital gains tax exemption on shares, the SSE, was introduced in 2002, and while the exemption was generally available for disposals of shares in trading companies by corporate members of trading groups, the rules were complex and their application was not always certain.
 
Further, and in contrast to participation exemptions in other EU countries, the exemption was not generally available for large institutional investors investing in real estate through intermediate companies.
 
In response to these concerns, changes are being made to the SSE rules that will take effect for disposals occurring on or after April 1, 2017.

 
Details

Broadly, under the current legislation, the following conditions must be met for a disposal of shares to be exempt from capital gains tax:
 
  1. The investing company must have held at least 10 percent of the ordinary share capital in the company being disposed throughout a 12- month period beginning not more than two years before the date of the disposal;
  2. The investing company must have been a sole trading company or member of a qualifying trading group throughout the relevant testing period (usually the twelve months prior to the disposal), and immediately after the disposal; and
  3. The company being disposed of must be a qualifying company (i.e. a trading company or holding company/sub-holding company of a trading group) throughout the relevant testing period (again, usually the twelve months prior to disposal), and immediately after the disposal.
 
The following changes to the rules are being introduced in the Finance Bill and take effect for disposals on or after April 1, 2017:
 
  • The condition outlined in paragraph 2 above is being removed.  It will no longer be necessary to test the trading status of the company making the disposal to qualify;
  • The period in paragraph 1 above, over which the SSE requirement can be satisfied, is being extended from 12 months in a two year period to 12 months within the six years prior to disposal
  • For unconnected party disposals, the requirement in paragraph 3 above, that the company being disposed of be a trading company immediately after the disposal, is being removed; and
  • The exemption will be extended to companies owned by certain qualifying institutional investors where the trading conditions are not met. For these investors the substantial shareholding condition may be met if the investing company’s shareholding is less than 10 percent of the ordinary share capital but the cost of the acquisition was at least GBP 50 million.  In terms of ownership of the company making the disposal, where at least 80 percent of the ordinary share capital of that company is owned by qualifying institutional investors, 100 percent of the gain will be exempt.  However, where between 25 percent and 80 percent of the company is owned, the percentage of the gain that is exempt will be reduced proportionally.


BDO Insights

The changes to the SSE regime will be welcomed by businesses.  In particular, the removal of the requirement that the company making the disposal be a member of a trading group should greatly reduce the amount of compliance required in order to satisfy the SSE and provide businesses with more certainty as to the application of the rules.
 

For more information, please contact one of the following practice leaders:
 
Robert Pedersen
Partner and International Tax
Practice Leader
         Joe Calianno
Partner and International Technical
Tax Practice Leader, National Tax Office

 
Ingrid Gardner
Managing Director UK/US Tax Desk
  Scott Hendon
Partner 

 
Monika Loving
Partner
  Chip Morgan
Partner 

 
William F. Roth III
Partner, National Tax Office
  Brad Rode
Partner 

 
Jerry Seade
Principal
  Annie Lee
Partner