International Tax Alert - June 2016

June 2016

The UK Government Releases Consultation Document on Reform of the Substantial Shareholdings Exemption

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On May 26, 2016, the UK government released a consultation document with respect to possible reform of the Substantial Shareholdings Exemption (“SSE”). 
The SSE was introduced in 2002 and provides an exemption from corporation tax for capital gains and losses on the disposal of certain qualifying shareholdings.  Since the introduction of the SSE there have been fundamental changes to both the domestic and international tax landscapes, as well as concerns raised about the complexity of the rules.  The consultation document has been issued as a means to consider whether there are reforms to the SSE that could be implemented to make it simpler, more coherent, and ensure that the United Kingdom remains competitive as a holding company location. 
The consultation will run until August 18, 2016, which will allow the UK government time to consider reform prior to the Autumn Statement.  Any changes to the SSE regime would be expected to be enacted in Finance Bill 2017.


The SSE was introduced in 2002 to ensure that the application of corporation tax to capital gains on share disposals did not unduly influence business decisions on restructuring and investment.  There are three requirements that must be met in order for the exemption to apply.  These are broadly summarized below:
  • The substantial shareholding requirement  -  The company making the disposal must have held at least 10 percent of the ordinary share capital of the company being disposed of for a continuous 12-month period in the two years prior to disposal;
  • The investing company requirement  -  The company making the disposal must be a trading company or a member of a trading group throughout the two years prior to, and immediately after, the disposal; and
  • The investee requirement  -  The company being disposed of must have been a trading company or a holding company of a trading sub-group throughout the two years prior to, and immediately after, the disposal.
For SSE purposes, a group is defined as a principal company and all the companies in which it holds a 51-percent shareholding either directly or indirectly.  This is measured by reference to “ordinary share capital.”  Difficulties have arisen in applying the grouping rules where there are entities that do not have ordinary share capital as defined in the UK legislation, e.g. partnerships, or United States limited liability companies.  It has also been noted that the trading requirements, particularly at the level of the investing company, can often make the availability of the SSE contingent on factors outside of the UK companies’ control. 
It is recognized that these complexities and uncertainties create unnecessary administrative burdens for business and can deter groups from using the UK as a holding company location.   The consultation document therefore seeks views on possible amendments to the SSE that would simplify the qualification requirements for the exemption, and ensure that the United Kingdom remains competitive as a holding company location.
Options being considered for reform of the SSE are:
  • Implementation of a more comprehensive exemption  -  This would be subject to parameters, such as ensuring that any exemption would not be available to shelter profits arising in the ordinary trading course of a business, ensuring equal application to gains and losses, and not creating scope for the tax-free transfer of enveloped passive assets;
  • Exemption subject to investee trading test  -  This would require trading conditions to be met with respect to the company being disposed of, to ensure that the exemption could not apply to the disposal of largely passive or non-business assets, but would remove the trading requirements for the company making the disposal;
  • Exemption subject to investee test other than trading  -  This option considers whether there are alternative (wider) conditions for the company being disposed of that could provide more targeted protection against abuse of the exemption, without impacting its wider applicability. For example, the company being disposed of could be required to be trading or actively conducting business activities other than trading;
  • Amended trading tests at investee and investor level ­­ -  Consideration is being given to changes that could be made to the SSE within its existing legislative framework, for example, focusing the investing and investee trading tests on the companies involved in the transaction rather than the wider group; and,
  • Changing the definition of “substantial shareholding”  -  Here, the government would be interested in examples of disposals of large and long-term investments that have not met SSE because of the current definition of “substantial shareholding.”  However, it should be noted that it is unlikely that the current ten percent threshold will be lowered or augmented with a minimum invested capital requirement. 

BDO Insights

  • The UK government believes that the SSE is generally realizing its policy objectives of ensuring that the tax treatment of share disposals does not unduly influence business decisions.  However, it also recognizes that the current SSE is complex, can create unnecessary administrative burdens for both the taxpayer and the UK tax authorities, and could be improved to make the United Kingdom a more competitive holding company location.
  • Responses to the consultation are due by August 18, 2016, after which it is expected that a further consultation document will be issued prior to the Autumn Statement, possibly with draft legislation for implementation in Finance Bill 2017.
  • For further information, please contact Ingrid Gardner or your usual BDO tax advisor.

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

Veena Parrikar
Principal, Transfer Pricing
  Chip Morgan

Monika Loving
  Brad Rode

William F. Roth III
Partner, National Tax Office
  Jerry Seade