The ‘Substantial Shareholding Exemption’ – Tax relief for business sales

Feb 22, 2022 | Tax Tuesday, Taxation

Substantial Shareholding Exemption

The UK prides itself on being an entrepreneurial and business-friendly nation.

The tax legislation reflects this by providing for various valuable tax reliefs which encourage this entrepreneurial spirit.

One such relief is the ‘substantial shareholding exemption’ (SSE).

What is the Substantial Shareholding Exemption?

The relief enables companies which sell their interest in a trading company to enjoy the gain tax-free.

There are conditions to be met and very broadly, the selling company must have owned at least a 10% stake in the trading company being sold for a period of at least 12 months.

The relief is extended to situations where the company being sold itself has not been owned for 12 months but the trading assets it owns have been used for this period by another group company.

This flexibility allows a group to hive down the trade to be sold into a new subsidiary in readiness to sale to a third party outside of the group.

This relaxation of the rules has clear commercial advantages for the purchaser in that the company they are buying will be a new clean trading company without any ‘skeletons in the closet’ in terms of liabilities they may not be aware of.

This relief is potentially very valuable in the right circumstances.

Are there any pitfalls?

There is a nasty trap for the unwary which, if fallen into, would mean a gain expected to be tax-free will not be!

Consider a single trading company with a number of different trading divisions.

If the owners decide to sell a particular division which they have been operating for a number of years, they may wish to transfer this to a newly incorporated subsidiary company and then sell that entity.

However, while the trading assets being sold have been used by the company for at least 12 months, they have not been ‘used by the group’ for this period.

This is simply because the group did not exist until the new subsidiary into which the trading assets hived down into was incorporated.

Any business owners in this position, where a singleton trading company with a number of different trading divisions is owned, may wish to incorporate a new subsidiary company way in advance of any intention to hive down and sell a particular division.

The existence of a ‘group’ for the requisite length of time will allow access to SSE, assuming all other conditions are met.

How can we help?

If you would like to discuss the SSE further, please contact your relationship principal or email for more information.

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