Policy paper

Reform of Substantial Shareholding Exemption for qualifying institutional investors

Published 5 December 2016

Who is likely to be affected

The measure will affect companies with shareholdings of 10% or more in another company who make a disposal of some or all of those shares otherwise than by on trading account, subject to certain conditions.

General description of the measure

The Substantial Shareholdings Exemption (SSE) exempts from the charge to tax gains or losses accruing on the disposal by companies of shares where certain conditions are met. The measure introduces changes to some of these qualifying conditions for the SSE for corporate capital gains.

The condition that the investing company is required to be a trading company or part of a trading group is being removed.

The condition that the investment must have been held for a continuous period, at minimum, of 12 months in the 2 years preceding the sale is being extended to a continuous period of 12 months in the 6 years preceding the sale. The condition that the company in which the shares are sold continues to be a qualifying company immediately after the sale is withdrawn, unless the sale is to a connected party.

For a class of investors defined as Qualifying Institutional Investors, the condition that the company in which the shares were sold is a trading company has also been removed. The legislation contains a list of Qualifying Institutional Investors.

The changes have effect for disposals on or after 1 April 2017.

Policy objective

The measure will simplify the SSE regime by removing some conditions which increase administrative burdens while still delivering on the original policy objectives, and to introduce a new and simpler exemption for companies owned by certain defined institutional investors, promoting the UK as a place where global investors can establish and manage their investments in trading businesses, infrastructure projects and real estate.

Background to the measure

The SSE was introduced in 2002 with the aim of eliminating the potential double taxation of trading profits in a company or sub-group being disposed of when these are realised by the shareholder by way of a disposal of their shareholding rather than, for example, by way of a dividend which would be exempted from tax in the hands of a corporate shareholder, and to facilitate the restructuring of groups without triggering a tax charge.

A review of the existing SSE rules was announced at Budget 2016, and a consultation document was issued on 23 May 2016. The consultation closed on 18 August 2016.

Detailed proposal

Operative date

The changes outlined below will apply in respect of disposals on or after 1 April 2017.

Current law

Finance Act 2002 introduced the SSE legislation.

The SSE legislation is set out as five distinct parts:

Part 1 - the exemptions available. The main exemption applies where the conditions in Parts 2 and 3 are met. Two subsidiary exemptions apply in certain circumstances where these requirement are not fully met.

Part 2 - the shareholding requirement. A company has a substantial shareholding in another company if it holds 10% or more of the ordinary share capital for a continuous period of twelve months beginning no more than two years before the date of a disposal.

Part 3 - the conditions for both the company that makes the disposal and for the company, the shares in which have been disposed of. These are referred to as ‘the investing company’ and ‘the company invested in’ respectively. Generally these require that the two companies are members of a trading group (or a sole trading company) throughout the period mentioned in part 2, and immediately after the disposal.

Part 4 - interpretation.

Part 5 - certain consequential matters.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to amend the following:

Part 2 - the shareholding requirement - will be amended so that the substantial shareholding condition may be met where a substantial shareholding is held throughout a continuous 12-month period beginning not more than 6 years before the day on which the disposal takes place. The shareholding requirement will be met in respect of qualifying shareholdings held up to four years earlier than at present.

Where the additional exemption relating to companies owned by qualifying institutional investors applies, the substantial shareholding condition may be met if the investing company’s shareholding is below 10% of the ordinary share capital but cost more than £50 million.

Part 3 - the requirements for the investor company and the company invested in - the conditions set out in paragraph 18, specifying trading conditions which the investor company must satisfy, will be removed. There will be no requirement for the investor company to meet any trading requirement either individually or as part of a wider trading group.

The requirements for the company invested in, in paragraph 19, will be amended so that the requirement for the trading condition to be met immediately post-disposal will apply only in circumstances where the sale is to a person connected to the investing company. There will be no requirement for the company invested in to meet the trading conditions post-disposal where the sale is to an unconnected party.

For companies owned by a specific class of investors, defined as Qualifying Institutional Investors, the measure provides for a further exemption which only requires that the substantial shareholding condition is met, the requirements in Part 3 do not apply. If at least 80% of the ordinary share capital of that company is owned directly or indirectly by one or more qualifying investors, then gains and losses of a disposal of shares will be exempt in full. Where between 25% and 80% is so owned, then a proportionate exemption is available.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
-	negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

Impact on individuals, households and families

No impact on individuals or households expected.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

There are no significant impacts on protected equality groups.

Impact on business including civil society organisations

There will be a negligible one-off cost to businesses as they familiarise themselves with the changes. Companies making share disposals who are part of a larger group and who spend time internally or pay an agent to demonstrate that the “trading group” investor test is passed should expect to see a reduction in administrative costs thanks to the removal of the trading test for the investor company.

The changes proposed also relieve both companies and where applicable, their groups, of the necessity to restructure shareholdings to benefit from SSE.

There is no impact on civil society organisations.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

There are no significant operational impacts on HMRC or HMT.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through regular communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Corey Herbertson on Telephone: 03000 542955 or email: corey.herbertson@hmrc.gsi.gov.uk.