The draft Finance Bill 2017 published on 5 December, includes changes to the substantial shareholdings exemption (“SSE”) regime and extends availability of relief from corporation tax on chargeable gains to many more companies. Broadly speaking, SSE is currently available on gains arising on the sale of shares in a trading company. The relief is only available where the company making the disposal has owned at least 10% of the shares and is itself a trading company or the holding company of a trading group, both before and after the sale.
The latter requirement means that SSE is generally not available when a holding company with a single trading subsidiary disposes of that subsidiary, because immediately after the disposal, the holding company is no longer the holding company of a trading group (there was a view that SSE would arise if such a holding company was liquidated immediately following the sale of its trading subsidiary, but the availability of exemption was not beyond doubt).
Relaxation of disposing company requirements
The proposed changes remove the trading requirement in relation to the company making the disposal, meaning such holding companies will be able to obtain SSE on a disposal of a trading subsidiary.
The availability of SSE in these cases could make a holding company structure more attractive where a trading company is currently held by individual shareholders. Under the present regime, the benefit of a holding company for asset protection and potential tax grouping purposes, has to be weighed against the likely corporation tax charge arising on sale of a subsidiary. In future, a holding company structure will offer additional flexibility for exiting a business and reinvesting cash in another activity without immediate tax cost, while still allowing the same freedoms to benefit from entrepreneurs’ relief through a liquidation of the holding company if desired.
However, the reforms do not extend beyond SSE and as such, do not affect the trading-related qualifying criteria that are applicable for entrepreneurs’ relief, for EMI and EIS purposes, or the availability of business property relief in relation to inheritance tax. The need to take into account the qualifying criteria for some or all of these regimes may limit a group’s ability to take advantage of the SSE changes, for example by consolidating all activities into a mixed trading/investment group. This will differ from case to case: for example, there may be instances where access to entrepreneurs’ relief becomes less important where the proceeds of disposing of a business can be realised tax-free in a holding company prior to reinvestment in a new business activity and a long term plan of deferral is in place.
Another key change is an exemption for qualifying institutional investors (“QIIs”). These include pension schemes, life assurance businesses, charities and various investment vehicles. Where 80% of the share capital of the company making the disposal is owned by QIIs, SSE is available regardless of the trading status of the company disposed of. Partial relief (calculated pro rata to the proportion of the disposing company’s share capital held by QIIs) is available provided that QIIs own less than 80% but more than 25% of the share capital.
For completeness, SSE will also become available where a company has spent more than £50m acquiring shares in a company even if those shares do not meet the usual 10% holding test. There is also a relaxation of the time period in which the qualifying threshold must be met prior to disposal (12 months in a 6-year period, rather than a 2-year period) and the requirement for the company disposed of to be a trading company immediately following disposal will be removed except in relation to situations where the disposal is to a connected party.
The changes will take effect from 1 April 2017, but given the 12 month holding period required to qualify for SSE, it is worth considering whether new holding structures should be implemented in advance of the legislation coming into force. Taxpayers may wish to consider deferring changes to their group structure or other transactions which could benefit for SSE under the new regime until after 1 April.
It’s important to recognise that the changes will apply from the effective date, subject to the Finance Bill receiving Royal Assent following its passage through Parliament. This process is unlikely to be completed before July 2017. The changes are not considered to be controversial, but given the Government’s small (and shrinking) majority and the unstable post-referendum political climate, where commercially possible it could be prudent to defer final execution of transactions until Royal Assent is given.