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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


Paragraph 7 Schedule 7AC TCGA 1992 provides that there is 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.

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 2004 it will continue to meet the substantial shareholding requirement for a further 12 months, 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 2004 the gain on the disposal will be exempt if all the conditions for the relief are met.