On 26 May 2016, the Government published a consultation document on possible reform of the substantial shareholdings exemption (SSE) which provides an exemption from corporation tax for capital gains and losses realised on the disposal of certain shareholdings. The aim is to consider whether there could be changes to make the SSE simpler, more coherent and more internationally competitive. The consultation document sets out a number of options for possible reform of the SSE, ranging from technical changes to the existing legislation, to a more comprehensive exemption along the lines of the participation exemption regimes which exist in a number of EU countries. The consultation will be open until 18 August and then the Government will consider the merits of reform ahead of the Autumn Statement and possible legislation in Finance Bill 2017.
In outline, the options for reform in the consultation document are:
- Comprehensive exemption
A new, wide ranging exemption with minimal requirements as to the nature or activities of the companies involved in the transaction. The Government is concerned that this could create scope for the tax-free transfer of enveloped passive assets and would need to be convinced this can be protected against.
- Exemption subject to investee trading test
A modification of the existing regime whereby the requirement that the company making the disposal be part of a trading group would be removed but the investee company trading test would be retained in order to protect against the tax-free transfer of enveloped passive assets.
- Exemption subject to investee test other than trading
A modification of the existing regime whereby the requirement that the company making the disposal be part of a trading group would be removed and the investee company requirements would be relaxed to include the carrying on of a trade or active business.
- Amended trading tests at investee and investor level
A modification of the existing regime whereby the trading requirements would be retained but focused on the companies involved in the transaction rather than applied at a group or sub-group level. This could help ensure that the availability of the SSE is contingent on factors that a UK company controls or has clear oversight of. Alternatively, option three could be applied at both the investor and investee level.
- Changing the definition of substantial shareholding
A modification of the existing regime whereby the substantial shareholding threshold would be lowered or augmented with a minimum invested capital requirement. The Government is sceptical about the merits of this.
The consultation also considers whether there could be a case for a reform of the SSE targeted towards the funds sector. This could allow, for example, pension and sovereign wealth funds to benefit from the exemption where their investments are made indirectly through a UK resident company.
Lastly, a number of detailed design modifications are put forward for consideration. These include:
- Allowing shares held via partnerships whose partners include non-group companies to be taken into account in determining whether the trading conditions are met;
- Allowing non-share entities to be taken into account in determining whether the trading conditions are met;
- Extending the period during which shares remaining after a holding has dropped below 10 percent can be sold and still benefit from the exemption from one year to six years, for example; and
- Relaxing the post-sale trading requirement as regards the application of disposal proceeds and, where the subsidiary exemption is relied upon, the timescale within which the investing company must be dissolved.
For further information please contact :
Jonathan Turner, Private Client