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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Substantial shareholdings exemption: the substantial shareholding requirement - the minimum size of the shareholding


Paragraph 8 Schedule 7AC TCGA 1992 defines what is a substantial shareholding. The investing company holds a substantial shareholding when it holds at least 10% of the ordinary share capital of the investee company and it is, or it would be, beneficially entitled to at least 10% of

  • the profits of the investee company available for distribution to its equity holders, and
  • the assets of the investee company available for distribution to its equity holders if it was wound up.

Schedule 18 ICTA 1988 is used, in a slightly modified form, to identify the equity holders of an investee company and to determine the profits and assets available for distribution to the equity holders. The modifications merely

  • replace references in Schedule 18 to sections 403C and 413(7) ICTA 1988 with references to paragraph 8(1) Schedule 7AC TCGA 1992;
  • prevent a bank from counting as an equity holder of the investee company in respect of loans made to the investee company in the ordinary course of its business;
  • disapply the rules in paragraph 5(3) of Schedule 18 when there are arrangements that could vary a shareholder’s entitlements;
  • disapply the rules in paragraphs 5(3) and 5B to 5E of Schedule 18 when certain options over shares have been granted;
  • disapply the rules in paragraph 5F of Schedule 18 for non-resident companies;
  • omit the alternative method of identifying the period being considered given by paragraph 7(1)(b) of Schedule 18.

There is guidance on Schedule 18 ICTA 1988 at CTM81005 onwards.

Paragraph 8(1) Schedule 7AC TCGA 1992 specifically provides that although 10% counts as a ‘substantial shareholding’ this is without prejudice to what is meant by ‘substantial’ in other contexts. Legislation often refers to whether something is ‘substantial’ as being a factor in whether a particular relief is available. This puts some limit on when a relief may be allowed without necessarily creating a cliff edge with the resultant hard cases that this causes. For these areas we have said that we consider that more than 20% will usually count as being ‘substantial’. There is no intention that the 10% limit in paragraph 8 should affect this view.

Paragraph 17 Schedule 7AC TCGA 1992 further modifies the rules governing what is a substantial shareholding for some shares held, directly or indirectly, by life assurance companies, but the taxation of insurance companies is not covered in detail by this manual (see CG69007). There is guidance on paragraph 17 in the Life Assurance Manual at LAM4A.261 onwards.