Substantial shareholdings exemption: the trading company/group/subgroup requirements - the qualifying period
TCGA92/SCH7AC/PARA18 & TCGA92/SCH7AC/PARA19
For disposals up to and including 31 March 2017, TCGA1992/Sch7AC/Para18 identified ‘the qualifying period’ throughout which the investing company must, to meet the investing company requirements, have been carrying on trading activities to a sufficient degree. Para 18 was repealed by F(2)A 2017 and does not affect disposals on or after 1 April 2017. TCGA1992/Sch7AC/Para19 requires the investee company to have carried out comparable activities during the same period.
The period runs from the start of the latest twelve month period throughout which the investing company met the substantial shareholding requirement (see CG53070 onwards) to the time of the disposal, or later. This may be modified where the conditions in TCGA1992/Sch7AC/Para15A (2)(b) to (d) are met (see CG53080C) the investee company is treated as having been a ‘qualifying company’ throughout the final 12 month period ending with the time of the disposal.
The normal rules in TCGA1992/S28 apply to determine the time of a disposal made under a contract (see CG14260 onwards). Where the time of the disposal under that section is before the time at which the asset is conveyed or transferred, the period is effectively extended to the time of conveyance or transfer TCGA1992/Sch7AC/Paras18(5) and 19(3).
Example 1 - Pre F(2)A 2017 changes
On 1 October 2012 company A acquires 12% of the ordinary share capital of company B. On 31 July 2014 company A sells one third of its shares in company B retaining 8% of that company’s ordinary share capital (the first disposal). On 31 January 2015 company A sells its remaining shares in company B (the second disposal). The conditions in TCGA1992/Sch7AC/Para15A (2)(b) to (d) are not relevant in this case.
The latest twelve month period throughout which company A held at least 10% of the ordinary share capital of company B is the period 1 August 2013 to 31 July 2014. The qualifying period starts on 1 August 2013 for both disposals and the period throughout which
- company A must satisfy the investing company requirements, and
- company B the investee company requirements
normally runs from 1 August 2013 to 31 July 2014 for the first disposal, and from 1 August 2013 to 31 January 2015 for the second isposal.
If the first disposal were under a contract and TCGA1992/S28 provided that 31 July 2014 was the time of the disposal, but the shares were not actually transferred until (say) 31 August 2014, the period would be extended and run from 1 August 2013 to 31 August 2014.
Example 2 - Pre F(2)A 2017 changes
The conditions in TCGA1992/Sch7AC/Para15A (2)(b) to (d) are relevant in this case (see CG53080C).
From the 1 October 2012 company A holds 100% of the ordinary share capital of company B. Company B operates a multifaceted trade. Company A receives an offer to sell a particular part of its trading activities. The buyer however would prefer to acquire this activity within a separate company rather than as a bundle of assets. In order to accommodate this requirement company A incorporates (acquires) a new wholly owned subsidiary, company C, on 1 June 2014 and company B transfers to it the assets used in the trade which is to be disposed of. Company A then sells the shares in company C on 1 July 2014.
On its own company C will not meet the minimum 12 month substantial shareholding requirement of TCGA1992/Sch7AC/Para7. But the conditions in TCGA1992/Sch7AC/Para15A (2)(b) to (d) are met because immediately before the disposal of the shares in company C, company A holds at least 10% of the ordinary share capital and the trade assets transferred into it from another group company, company B, were used for the purpose its trade.