The conditions of the SSE have been relaxed significantly, in particular for companies owned by qualifying institutional investors.
Who should read this?
Investors in UK companies.
Summary of proposal
For disposals on or after 1 April 2017, the condition that the company making the disposal must be a trading company or member of a trading group has been withdrawn. The condition that the company being sold must meet the trading condition immediately after the disposal has also been withdrawn, provided the disposal is to an unconnected person. In addition, the exemption has been extended to disposals of shareholdings of less than 10%, provided at least 10% was held for a 12 month period within the six years up to the disposal (previously two years).
A further extension of the exemption has been introduced for companies owned by qualifying institutional investors. For such companies, the condition that the company being sold must be a trading company or holding company of a trading sub-group has also been withdrawn. Where the company is owned at least 80% by qualifying institutional investors, gains/losses will be fully exempt and a proportionate exemption will apply to a company owned more than 25% but less than 80% by qualifying institutional investors. The ownership condition in the company can be direct or indirect but not traced through a listed company. The substantial shareholding requirement itself has been extended to cover holdings with an acquisition cost of at least £50 million (in cases where the 10% minimum holding would not be met). The list of qualifying institutional investors contained in the legislation comprises: pension schemes, life assurance businesses, sovereign wealth funds, charities, investment trusts and widely marketed UK investment schemes.
The changes will apply to disposals on or after 1 April 2017.
The withdrawal of the investor trading condition removes many of the difficulties/uncertainties surrounding the existing rules, not least for UK subsidiaries who may not have full visibility of the wider group and the challenges of applying the UK grouping test to non-UK entities. It will also enable groups with mixed trading/investment activities to access the exemption for disposals of trading businesses and it will no longer be necessary to navigate the problematic conditions of the liquidation condition of the subsidiary exemption.
The withdrawal of the post disposal trading condition for the company being sold is helpful as meeting this condition was not wholly within the control of the vendor.
The extension of the look back period for disposals of small shareholdings of less than 10% will clearly be helpful for investors disposing of interests in tranches, whilst limiting the availability of capital losses in such circumstances.
The new exemption for companies owned by qualifying institutional investors is welcomed. The list of qualifying institutional investors does not include real estate investment trusts (HMRC have stated that they are continuing to consider this) or non-UK investment schemes. A key challenge in practice is likely to be identifying and tracking the investment base where qualifying institutional investor ownership is not clearly over 80%.
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