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Reform of the substantial shareholding exemption (SSE)

Reform of the substantial shareholding exemption (SSE)

The conditions of the SSE have been relaxed significantly, in particular for companies owned by qualifying institutional investors.


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Who should read this?

Investors in UK companies.

Summary of proposal

For disposals on or after 1 April 2017, the condition that the company making the disposal must be a trading company or member of a trading group has been withdrawn. The condition that the company being sold must meet the trading condition immediately after the disposal has also been withdrawn (except where trading activities have been hived down to a Newco which is then sold with the benefit of the SSE), provided the disposal is to an unconnected person. In addition, the exemption has been extended to disposals of shareholdings of less than 10%, provided at least 10% was held for a 12 month period within the six years up to the disposal (previously two years).

A further extension of the exemption has been introduced for companies owned by qualifying institutional investors (QIIs). For such companies, the condition that the company being sold must be a trading company or holding company of a trading sub-group has also been withdrawn. Where the company is owned at least 80% by QIIs, gains/losses will be fully exempt and a proportionate exemption will apply to a company owned more than 25% but less than 80% by QIIs. The ownership in the company can be direct or indirect but not traced through a listed company. The substantial shareholding requirement itself has been extended in a case where at least 25% of the ordinary share capital of the investing company is owned by QIIs to cover holdings with an acquisition cost of at least £20 million (in cases where the 10% minimum holding would not be met).  The list of QIIs contained in the legislation comprises: pension schemes, life assurance businesses, sovereign wealth funds, charities, investment trusts, authorised investment funds and exempt unauthorised unit trusts.

Key changes from the draft legislation

A number of changes have been made to the draft legislation published on 5 December 2016.  The key points are:

  • Paragraph 10 of Schedule 7AC TCGA 1992 allows the period for which a substantial shareholding is treated as having been held to be extended by previous no gain/no loss transfers, typically under section 171 TCGA.  Paragraph 10 will now apply where the transfer is from any member of the worldwide capital gains group.
  • The requirement that the company invested in be a trading company immediately after the disposal will continue to apply where the SSE applies as a result of paragraph 15A.  Paragraph 15A is the provision that allows trading activities to be hived down to a Newco which is then sold with the benefit of SSE.
  • The new subsidiary exemption for QIIs has been amended to make it clear that ownership by QIIs can be traced through partnerships.  New paragraph 3B(6) treats each partner as owning a proportion of the share capital equal to the partner’s proportionate interest in that share capital.
  • Where the new subsidiary exemption for QIIs applies, an investment costing £20 million will be treated as a substantial shareholding. This figure was previously £50 million.


The changes will apply to disposals on or after 1 April 2017.

Our view

The withdrawal of the investor trading condition removes many of the difficulties/uncertainties surrounding the existing rules, not least for UK subsidiaries who may not have full visibility of the wider group and the challenges of applying the UK grouping test to non-UK entities. It will also enable groups with mixed trading/investment activities to access the exemption for disposals of trading businesses and it will no longer be necessary to navigate the problematic conditions of the liquidation condition of the subsidiary exemption.

The withdrawal of the post disposal trading condition for the company being sold is helpful as meeting this condition was not wholly within the control of the vendor.

The extension of the look back period for disposals of small shareholdings of less than 10% will clearly be helpful for investors disposing of interests in tranches, whilst limiting the availability of capital losses in such circumstances.

The new exemption for companies owned by QIIs is welcomed. A key challenge in practice is likely to be identifying and tracking the investment base where QII ownership is not clearly 80% or more. 


Iain Kerr

+44 (0)20 7311 5621

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