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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Substantial shareholdings exemption: the trading company/group/subgroup requirements - when are non-trading activities substantial


A common consideration in deciding whether a company, group or subgroup counts as trading is whether the extent of the entity’s non-trading activities is ‘substantial’. The penultimate paragraph at CG53072 explains the background to the general approach of legislation that relies on excluding cases where something is ‘substantial’. It also makes clear that the 10% limit on what may count as a ‘substantial shareholding’ applies only for the purposes of paragraph 8 (1) Schedule 7AC TCGA 1992.

Most companies groups and subgroups will have some activities that are not trading activities. The legislation provides that such companies and groups still count as trading if their activities “… do not include to a substantial extent activities other than trading activities”.

The phrase “substantial extent” is used in various parts of the TCGA 1992 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. In this context ‘substantial’ means more than 20%.

A company, group or subgroup whose non-trading activities amount to more than 20% of its total activities (excluding intra- group or intra-subgroup activities) does not meet the trading requirement. Some or all of the following are among the indicators that might be taken into account in reviewing a particular company, group or subgroup’s status.

  • The level of turnover received from non-trading activities (CG53116a).
  • Whether the value of non-trading assets was substantial in relation to the value of all assets (CG53116b).
  • The expenditure incurred or time spent by officers and employees on non-trading activities (CG53116c).
  • The company’s history (CG53116d).

Balance of indicators

These indicators should not be regarded as individual definitive tests to which a 20% “limit” applies. They are factors, or indicators, that may be useful in establishing whether there is substantial overall non-trading activity. It may be that some indicators point in one direction and others the opposite way. You should weigh up the relevance of each in the context of the individual case and judge the matter “in the round” (see approach of the Special Commissioner in the IHT case of Farmer and another (exors of Farmer dec’d) v IRC SpC 216). If you are unable to agree the status of a particular company for a period then the issue could be established only as a question of fact before the First-tier Tribunal. It is anticipated that such cases will be relatively rare.