Stephen Hemmings – Partner
The decision by the government to relax the SSE rules means that UK corporates will be allowed tax free disposal of trading investments! Menzies Stephen Hemmings explains what the changes really mean for business.
The draft 2017 Finance Bill, released last month, contained some welcome changes to the Substantial Shareholdings Exemption (SSE) for UK companies disposing of investments in trading companies. These changes will take affect from 1 April 2017.
What is Substantial Shareholdings Exemption (SSE)
As a recap, SSE allows UK corporates to dispose of interests in trading companies, it holds at least 10% of the ordinary shares in, on a tax free basis if they meet certain conditions. The SSE legislation is particularly complex, and in some areas confusing and the conditions are often difficult to adhere to. The changes announced represent a move to simplify the rules and make them easier to meet, bringing the UK more into line with similar reliefs offered by other EU countries.
The main changes to SSE
The main change is that the disposal group or company no longer needs to be trading itself after the sale which should make the relief easier to claim. As a seller you may therefore benefit from delaying a sale until April when the new rules take effect (or asking the purchaser to fund the tax difference if they sell before then).
We have summarised all of the proposed changes below, as well as the potential implications for Menzies clients;
1 – As stated above, the investing company (or group) trading condition has been removed. This brings us more in line with other similar EU based exemptions.
This will be useful for holding companies disposing of their only trading company. They will no longer need to rely on a subsidiary and uncertain exemption where there are imminent plans for a winding up. This change will also be helpful for mixed groups, such as property groups with some trading and some investment activity.
2 – The period in which the relevant holdings condition has to be met has been extended. Previously it was 12 months continuously within the two years before a sale, this has now been extended to 12 months continuously within a six year period.
This is unlikely to be very relevant. One situation it could be useful in is an earnout (say over 3 years) with unascertainable consideration. In normal circumstances any value received over and above the initial valued right to the unascertainable consideration would not qualify for SSE. Using the above change it should be possible to instead retain some share in the company being sold, with a put option to sell this in three years at a certain value. The extra consideration received in three years time would now fall within SSE as the seller would have met the conditions for SSE within the last six years.
3 – The condition that investee companies must be trading immediately following the disposal has also been removed.
This will be useful where previously there was uncertainty due to conditions outside of sellers control i.e. if purchaser bought and then immediately hived up a trade, or where a business ceased during the period between exchange and completion before a redevelopment or change of business.
4 – There is also going to be a broader exemption for companies owned by qualifying institutional investors.
This is unlikely to affect many clients.
The SSE provisions are very detailed, so please speak to your Menzies contact about the implications if you are a corporate and considering selling an investment in a trading company.