IFM40530 - Group issues: continuity of substantial shareholdings

FA22/SCH2/PARA34

Availability of substantial shareholding exemption (SSE) on transfer of qualifying shares from a group company

When a company enters the QAHC regime there will be a deemed disposal of certain assets held, including qualifying shares. If a company enters the QAHC regime while holding qualifying shares for a period of less than twelve months, FA22/SCH2/PARA17 provides an adjustment to the SSE rules so that SSE may apply to a resultant gain/loss (IFM40340).

When an asset is transferred from a group company to the QAHC ring fence business of a QAHC, the tax neutral transfer rules will be turned off and a disposal will occur (IFM40520). In these circumstances, PARA 34 provides similar rules to those in PARA 17 in order to achieve an equivalence with the way in which SSE applies.

If a group company transfers qualifying shares to a QAHC and the shares have been held by the group company for less than twelve months, the SSE may apply to a gain/loss arising from the disposal at time of transfer. TCGA92/SCH7AC/PARA10 applies when considering how long the group company, which transferred the shares to the QAHC, is treated as having held the shares for (CG53080A).

In order for SSE to apply:

  • The QAHC must hold a substantial shareholding in a company as a result of a group company disposing qualifying shares to the QAHC;
  • Immediately before the group company transferred the shares it must have also held a substantial shareholding in that company as a result of holding the shares disposed of;
  • The QAHC must continue to hold the shares until they have been held for a combined period of twelve months (period of group company ownership plus period of QAHC ownership); and
  • If the QAHC had instead held the shares for the entire twelve month period, any gain arising from a disposal immediately after the twelve month date would not be chargeable as a result of a SSE (CG53000p).

To ensure that the SSE rules can apply appropriately to qualifying shares transferred to a QAHC from a group company, PARA 34(2) turns off the aggregation of holdings of group companies (TCGA92/SCH7AC/PARA9) and the effect of deemed disposal and reacquisition (TCGA92/SCH7AC/PARA11) in relation to share transfers which meet the requirements of PARA 34(1). TCGA92/SCH7AC/PARA19(1) is also amended in relation to PARA 34(1)(d) so that the investing company requirements of the QAHC only have to be met for the 12-month period referred to in PARA 34(1)(d) as opposed to the entire period up to the date of disposal.

In this context, a company will be considered a group company if they meet the requirements of TCGA92/S170 (CG45100p).

Example

A company has held a substantial shareholding of qualifying shares for three months before transferring them to a QAHC in the same group. The qualifying shares are treated as disposed of by the group company and acquired by the QAHC at point of transfer. The qualifying shares are eventually sold by the QAHC to a third party after being held for a total period of three years (three months for the group company and two years and nine months for the QAHC).

If all the substantial shareholding requirements are met immediately after the date in which the qualifying shares have been held for a combined period of twelve months (three months for the group company and nine months for the QAHC), then the gain/loss accruing to the group company from the deemed disposal of the qualifying shares at point of transfer to the QAHC is not a chargeable gain/allowable loss.