The substantial shareholdings exemption: Options for reform

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Donald-Drysdale By Donald Drysdale for ICAS

11 July 2016

Donald Drysdale examines potential changes that could make the SSE more accessible.

What is the SSE?

The substantial shareholdings exemption (SSE) allows capital gains and losses realised on the disposal of certain shareholdings to be exempt from UK corporation tax. In spite of its name, it can be relevant to both large and small companies, and may arise on large or small disposals.

It was introduced in 2002 to enable trading groups to make rational business decisions on restructuring, reinvestment and the disposal of shares in trading companies without being discouraged by potential corporation tax liabilities. It also aimed to discourage groups from adopting complex offshore holding structures which reduce transparency and create unnecessary administrative burdens for businesses and HMRC.

The SSE applies where a gain arises on disposal of shares and, throughout a continuous 12-month period beginning not more than two years before the disposal, the investing company held a 'substantial shareholding' in the investee company (i.e. the company whose shares are the subject of the disposal). For this purpose a substantial shareholding is, broadly, an interest of at least 10%. The SSE also extends to certain assets related to shares, such as share options or convertible securities.

The need for reform

The qualifying conditions for the SSE are detailed and unforgiving. For example, the investing company must be a trading company or a member of a trading group and the investee company must be a trading company or the holding company of a trading group (or sub-group); these conditions must be satisfied both before and after the disposal of the shares for the exemption to apply. Some companies fail to qualify in circumstances where they feel they should, while others succeed by complex and convoluted tax planning. Simplification is badly needed.

Attracting holding companies to the UK brings direct and indirect economic benefits such as employment, investment and tax receipts, and assumes even greater importance than hitherto now that the UK electorate has voted to leave the EU. A number of existing features of the UK tax regime have made it highly attractive for holding company operations, including a largely territorial basis of tax, exemption for inward corporate distributions, no withholding taxes on outward dividends and an extensive network of double tax treaties. These characteristics are especially important at the present time, when many multinational groups are re-examining their structures in response to the Brexit vote and actions emerging from the OECD’s BEPS project.

Some aspects of SSE are now viewed in a negative light, particularly by groups with substantial investment assets or companies disposing of shares in non-trading companies.

Some aspects of SSE are now viewed in a negative light, particularly by groups with substantial investment assets or companies disposing of shares in non-trading companies.  The relief has failed to keep up with fundamental changes to the domestic and international tax landscapes since it was first introduced. Its provisions are now seen as lacking simplicity, competitiveness and coherence. There are also concerns about the potential for its application to be uncertain or dependent on factors outside a company’s control. Thankfully the government has recognised these weaknesses.

Consultation on reform

On 26 May, HM Treasury launched a consultation on possible reform of the SSE. The consultation paper offers ideas for discussion rather than firm proposals. It sets out a number of options, ranging from technical changes to the existing legislation to a more comprehensive exemption for gains on substantial share disposals that would bring it more closely into line with the wider participation exemption for company disposals found in many other competing jurisdictions.

The paper discusses the impact of these options and the potential benefits for the UK economy. It also considers potential risks to the Exchequer associated with reform and how these risks might be mitigated. The tone of the document is open and constructive, and the government seems genuinely willing to address shortcomings that have emerged since the SSE was introduced some 14 years ago.

Possible reforms

In outline, the options for reform set out in the consultation paper are as follows:

Option 1: Comprehensive exemption

There could be a new, wide-ranging exemption for gains on substantial share disposals, with minimal requirements as to the nature or activities of the companies involved in the transaction. However, among specific government concerns are that the exemption should be confined as far as possible to gains derived from taxed income, and that it should not create scope for the tax-free transfer of enveloped passive assets.

Option 2: Exemption subject to investee trading test

New rules could retain the trading condition on the company or sub-group being disposed of, but remove the condition that the company making the disposal must be part of a trading group. This would significantly simplify the SSE. It would also make the exemption available whenever a trading company or sub-group is disposed of, even where the disposal is made by an investment company or a company within a substantially non-trading group.

Option 3: Exemption subject to investee test other than trading

Changes could remove the requirement that the company making the disposal must be part of a trading group, while requiring the company or sub-group being disposed of to be either trading or actively conducting business activities other than trading. Acceptable non-trading business activities might perhaps include certain activities positively defined in legislation, and/or investment companies to the extent that there are significant associated management functions.

Option 4: Amended trading tests at investee and investor level

The SSE could be simplified by focusing the investing and investee trading tests on the companies involved in the transaction, rather than applying them at a group or sub-group level. This could also help ensure that the availability of the exemption relies on factors over which a UK company has more control.

Option 5: Changing the definition of ‘substantial shareholding’

The definition of a substantial shareholding as at least 10% of a company’s ordinary share capital could be amended by lowering the 10% threshold, perhaps qualified by a minimum invested capital requirement. The government is sceptical about such a change and would need to be persuaded that there is strong justification for it.

Having set out these options, the paper illustrates them in flowchart style in an annex. This demonstrates that all the options could be combined by changing the definition of a substantial shareholding. Alternatively, all the options except Option 1 could be combined by changing the application of the trading conditions, targeting them towards the companies involved in the transaction as opposed to the group/sub-group.

In addition to the five key options, the paper also considers whether SSE reforms might be targeted towards the funds sector, where the UK is rarely the favoured location for a holding entity. Such a move could allow funds such as pension funds and sovereign wealth funds to benefit from the exemption where they invest indirectly through UK companies. The government is seeking input on how SSE-qualifying funds might be defined for this purpose.

Finally, the paper suggests detailed design modifications in areas where the existing SSE legislation is ambiguous or conflicts with the government’s policy intentions. These suggestions include:

  • Taking account of partnership interests in determining whether the trading conditions apply.
  • Taking account of other structures without share capital in determining whether the trading conditions apply.
  • Extending the period over which the 10% shareholding requirement can be satisfied, from two years to perhaps six years in line with the period that applies for the de-grouping rules.
  • Providing for the post-sale trading requirement not to apply where a disposal has been made as part of a winding up or dissolution which occurs within a reasonable timescale.


The Treasury invites responses by 18 August, and will then consider the merits of reform ahead of this year’s Autumn Statement. If you have views which you feel ICAS should take into account in responding, please email them to

Article supplied by Taxing Words Ltd.


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