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HMRC internal manual

Capital Gains Manual

Substantial shareholdings exemption: the substantial shareholding requirement - the period over which a substantial shareholding must be held

TCGA92/SCH7AC/PARA7 amended by F(2)A 2017

For disposals on or before 31 March 2017, paragraph 7 Schedule 7AC TCGA 1992 provided for a period of one year during which a company that has held a substantial shareholding for at least 12 months will continue to count as meeting the substantial shareholding requirement after the holding falls below 10%. This is to allow a company that has met the substantial shareholding requirement to benefit from the exemption if it sells the shares in tranches over a period of time.

This period was extended in F(2)A 2017 to five years rather than one, so for disposals from 1 April 2017 companies will have five years after the date at which a holding, held for at least 12 months, falls below 10% in which they continue to meet the substantial shareholding condition. This enables companies disposing of shares in tranches over a number of years, or disposing of shares after dilution of share capital has caused their holding to fall below 10%, to benefit from the exemptio­­n over a longer period than previously.

In most cases a company will simply sell all the shares it holds in another company. Broadly speaking, the substantial shareholding requirement will be met in such cases if the investing company has held 10% or more of the ordinary share capital of the investee company for at least 12 months up to the time of the disposal.

However, suppose a company has issued 1,000 ordinary shares and another company has held 150 of those shares for more than 12 months so that it meets the substantial shareholding requirement. If the investing company sells 80 of the shares on 1 January 2018  it will continue to meet the substantial shareholding requirement for a further 60 months (12 months for disposals on or before 31 March 2017) even though from that date it only holds 7% of the company’s ordinary share capital. So if the investing company disposes of any of the remaining shares by 31 December 2022 the gain on the disposal will be exempt if all the conditions for the relief are met.

If however the disposal of 80 shares took place on 1 January 2016, before the changes introduced by F(2)A 2017, whether subsequent disposals of the remaining shares meet the substantial shareholding requirement will depend on when it takes place.

For disposals between 1 January 2016 and 31 December 2016, the “old” substantial shareholding test will apply and will be satisfied - a qualifying period of 12 months beginning no later than two years before the disposal.

For disposals between 1 January 2017 and 31 March 2017 the “old” substantial shareholding test will apply but will not be satisfied – there is no qualifying period of 12 months beginning no later than two years before the disposal.

For disposals from 1 April 2017 onwards the “new” rules will apply and the substantial shareholding test will be met until 31 December 2020 – five years after the holding fell below 10% on 1 January 2016.