Iain Kerr provides an update on the reform of the substantial shareholdings exemption and an overall simplification to the trading conditions.
Note to the reader: The measures examined in this article have been removed from Finance Bill 2017. We understand that the Financial Secretariat to the Treasury has notified the House of Commons that these delayed measures are intended to be reintroduced at the earliest opportunity post-election. The expectation is that if the measures are reintroduced, this would occur in a summer Finance Bill soon after the election, and the start dates of these measures are likely to remain at 1 April 2017.
The reform of the substantial shareholdings exemption (“SSE”) is expected to bring about a simplification. This reform accounted for only six pages of the draft Finance Bill 2017, most of which were devoted to the new exemption for qualifying institutional investors, and would apply to disposals on or after 1 April 2017.
Turning to the changes to the historical exemption first, the requirement that the company making the disposal be a trading company or member of a trading group is to be removed. The removal of this requirement will provide increased certainty in the application of the rules. It will no longer be necessary to determine whether the worldwide group is trading in order to conclude whether the SSE applies. Once the substantial shareholding requirement is met, that determination will turn solely upon the character of the company being sold. This should mean that the sale of a trading subsidiary by an investment group can qualify, and that an investment which would qualify for the exemption cannot subsequently cease to do so because of changes elsewhere in the group.
Whilst notice of this change was given in the Autumn Statement, the change to the requirements relating to the company being disposed of came as a pleasant surprise. The company being disposed of will no longer need to satisfy the trading test immediately after disposal where the disposal is to an unconnected party unless the disposal is of a new company to which a trade has been hived down. This is helpful as immediately after disposal here means immediately after the time of the conveyance or transfer i.e. completion. At this time, the vendor will no longer control the company being disposed of and the purchaser may want to hive-up the business, giving rise to concerns that the requirement would not be met.
The period for which a company has held shares will now be treated as extended by any earlier period during which the shares were held by a non-UK tax resident group company. Consequently it will no longer be necessary for 12 months to have elapsed before shares acquired from an overseas group company can become eligible for the SSE.
The final change to the historical exemption is to extend by 4 years the period for which shares can be sold with the benefit of SSE once the shareholding has fallen below 10%. This enables the sale of shares standing at a gain in tranches and serves as a deterrent for tax planning in relation to companies sold at a loss.
Where the new exemption for qualifying institutional investors (“QIIs”) applies, neither the company making the disposal nor the company being disposed of will need to satisfy a trading test so the sale of property investment companies and IP holding companies will be able to benefit from the SSE. Under this new exemption, the substantial shareholding requirement may also be met if the company making the disposal owns less than 10% of the shares in the company being disposed of provided that the cost of those shares on acquisition was at least £20 million. This will allow large investments in items such as infrastructure projects which do not meet the 10% threshold due to their sheer scale to nevertheless qualify for the SSE. Full exemption will be available where, immediately before disposal, the company being disposed of is ultimately owned as to 80% or more by QIIs. Ultimate ownership can be traced through intervening partnerships or companies but not through any company whose shares are listed on a recognised stock exchange (unless that company is a UK REIT or a QII). Proportional exemption will apply to companies which are more than 25% but less than 80% owned by QIIs. QIIs are pension scheme trustees and managers, companies carrying on life assurance business, sovereign wealth funds, charities, investment trusts, authorised investment funds and the trustees of exempt unauthorised unit trusts. Where they invest directly, these investors are all exempt from UK tax on gains due to their status.
In an M&A context, reform of the SSE is particularly relevant when considering the suitability of UK acquisition structures and considerations pertaining to future exit scenarios.
The key benefits are increased certainty on application of the rules, the ability to sell shares standing at a gain in tranches and the new exemption for institutional investors.