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The Substantial Shareholding Exemption (SSE) provides for a tax exemption in respect of gains realised by a company on the disposal of a "substantial shareholding" (being essentially at least 10% of the ordinary share capital) in another company (the target).

Various conditions have to be met for the SSE to apply, including both the target and selling companies undertaking trading activities. This has reduced the effectiveness of the SSE, and therefore HMRC consulted in 2016 on a range of proposals. The outcome was that a number of beneficial changes to the SSE took effect as from 1 April 2017. Some of the main changes are set out below.

  • The selling company no longer needs to be trading. This will enable pure holding companies to take advantage of the SSE.
  • The SSE is extended to seller companies owned by qualifying institutional investors. In this case, the SSE will be available whether or not the target is a trading company. The full SSE can be claimed if the institutional investors hold 80% or more of the shares in the seller at the date of disposal; and there is a sliding scale for shareholdings of at least 25%, but less than 80%. An institutional investor includes registered investment trusts and certain authorised investment funds, but not REITs.

The above changes, and others, improve the effectiveness of the SSE. Indeed, HMRC has stated recently that the widening of the SSE to include the involvement of institutional investors could result in it applying to the sale of certain real estate investment companies.

Action point

  1. If you are disposing of a substantial shareholding check the conditions of the SSE to see if you can structure your transaction to fall within its terms.