UK and International Tax news

Reform Of The Substantial Shareholdings Exemption Update

Tuesday 20th December 2016

HMT has recently issued its summary of the response to the proposed reform of the substantial shareholdings exemption announced by the Chancellor in the 2016 Budget.

The Substantial Shareholdings Exemption (SSE) is an exemption from corporation tax on capital gains and losses realised on the disposal of certain substantial shareholdings. The SSE was designed to address concerns that a corporation tax charge on share disposal gains could be unduly influencing business decisions on restructuring and reinvestment and creating incentives for groups to adopt complex offshore holding structures, reducing transparency and creating unnecessary administrative burdens for businesses and HMRC.

The government announced in the 2016 Budget that it would consult on possible reform of the SSE for corporate capital gains and a consultation document ‘Reform of the Substantial Shareholdings Exemption’, was published on 26 May 2016.  The consultation closed on 18 August 2016.

The consultation considered whether there could be reforms to make the SSE simpler, more coherent and more internationally competitive.

These potential reforms ranged from technical changes to the existing legislation to a more comprehensive exemption for gains on substantial share disposals that corresponds with participation exemption regimes in place in some other EU countries.

Two important themes arose from the consultation responses:

First, it was noted that while the SSE is generally available for disposals and reorganisations within trading groups, the group-level trading requirements at the level of the investing and investee entities mean that it is complex and uncertain to administer.

Second, it was noted that unlike the participation regimes in other EU countries, the SSE is not generally available for large institutional investors that invest in real-estate through intermediate companies.

Respondents considered that proportionate changes to the SSE could help to address these concerns and benefit the UK by reducing the administrative tax burden on businesses and making it a more attractive location for investors to locate their holding platforms and related activities.

In response to this the government has decided to take the following steps:

(i) to remove the investing company trading condition so that the availability of the SSE will no longer be contingent on the company making the disposal, or the group of which it is a part, satisfying a trading test. This should make the benefits of the SSE more certain for those making decisions on corporate disposals and reduce its sensitivity to activities elsewhere in the group over which it has no control.

(ii) to extend the period over which the substantial shareholding requirement can be satisfied from 12 months within two years to 12 months within 6 years prior to disposal. The SSE will now apply to disposals of shareholdings of less than 10% in situations where a substantial shareholding had been partially disposed of up to 5 years previously. This will make the application of the SSE more certain for companies which may sell their shareholdings in multiple tranches.

(iii) to remove the post-disposal investee trading condition so that the availability of the SSE will no longer be contingent on the company being disposed of, or the subgroup of which it is the parent, satisfying the trading test immediately after disposal where the disposal is to an unconnected party. This should improve businesses’ certainty that the SSE will apply in situations where it may be difficult to ascertain the trading status of the activities of the company being disposed of immediately after the disposal.

(iv) to introduce a broader exemption for companies owned by qualifying institutional investors so that the availability of the SSE to companies which are owned by qualifying institutional investors will no longer be contingent on either the company making the disposal or the company being disposed of satisfying a trading test. A proportional exemption will apply to companies which are more than 25% but less than 80% owned by qualifying institutional investors. This is expected to make the UK a more attractive location for such investors to locate their investment holding platforms.

The government thinks this will provide for a simpler and more internationally competitive regime, which remains safeguarded against abuse and continues to provide value-for-money to the Exchequer.

However, the government does not believe that the costs and risks of a full participation exemption are proportionate to the benefits to the UK economy at this stage, but will monitor this as part of its wider commitment to a competitive and territorial UK tax system.

The government will legislate in the 2017 Finance Bill to simplify the regime, remove the investor requirement and provide a more comprehensive exemption for companies owned by qualifying institutional investors. The changes will take effect from April 2017.

If you would like more information on the above changes, please contact Keith Rushen on 0207 486 2378.

 

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