substantial shareholding exemption uk - Parmentier Arthur Independent Advisors with offices in London

• This important exemption covers shareholdings of 10% or more, and can also apply to joint-venture situations
• The shares must be held by another company as an investment, i.e. not as a dealing asset
• The disposal must occur on or after 1 April 2002
• If a gain arises on disposals, this will be exempt from tax, provided that certain conditions are met Conversely, a capital loss will not be recognised for tax purposes

What are the criteria?

• The vendor must be a trading company or a member of a trading group
• The shareholding must be 10% or more - see below
• The shares must be in a trading company or the holding company of a trading group
• The shares must have been held for a continuous period of at least 12 months within the 24-month period leading up to the disposal

It should be noted that the vendor company must not carry on non-trading activities to any "substantial extent". This phrase is not defined, but - based on the rules for Taper Relief - it seems that non-trading activities should not exceed 20%, based on assets, turnover, expenses and/or management time.

What exactly is a 10% shareholding?

• The investor must be entitled to at least 10% of the ordinary share capital of the investee company, to at least 10% of profits available for distribution to equity holders, and at least 10% of the assets available for distribution to equity holders in a winding-up
• The 10%+ shareholding does not actually have to be wholly held by the vendor company. It is permissible to aggregate shareholdings within the worldwide group to determine whether the 10% test is met

What are the criteria for the investee company

The investee company must be a trading company or the holding company of a trading company.

How does the 12-month period work?

The various conditions about trading status must be met by both the investor company and the investee company throughout the 12 months up to disposal and also immediately after the disposal. The investor (or the group) must have held 10% or more of the share capital for a continuous period of at least 12 months during the 2-year period leading up to disposal.

Example

ABC Group held 15% of the share capital of X Plc from 1 August 1999 to 31 October 2003, when it sells 12%.

Exemption applies, as the disposal occurred after 31 March 2002.

If the remaining 3% is sold on 1 October 2004, the gain on that sale will be exempt, because the 12 months ownership rule has been met during the preceding 2 years.

Are there any special rules for intra group transactions?

When a company leaves a group, holding shares etc acquired from another group member within the preceding 6 years, a "de-grouping charge" operates, whereby a gain or loss is deemed to arise in the company leaving the group as at the beginning of the accounting period in which it leaves the group. The charge is calculated by reference to the market value of the transferred asset at the time of the transfer.

The exemption is available in this connection. Three other reliefs are available to alleviate the position on the de-grouping charge in general.

1. The transferee company can claim rollover relief on the notional gain, provided that the criteria for rollover relief are met
2. The transferee company can elect for the notional gain to be re-allocated to another member of the group which it has left
3. If the election in 2. above has been made, then the company to which the notional gain is re-allocated will be able to claim rollover relief as in 1. above

Of course, shares do not qualify for rollover relief, so 2. above will be the only one of the above which is helpful in the context of intra-group share transfers, if the criteria for exemption are not met.

Are there any anti-avoidance rules? 

Yes, and these are potentially wide-ranging.

The rules cover the situation where a substantial part of the gain arising on the disposal is attributable to untaxed accrued profits in the investee company and the "sole or main benefit" arising from the disposal is taking advantage of the new exemption. This is probably aimed mainly at the situation where the investee company holds a property which would give rise to a large gain on disposal.

Tax planning possibilities

• Optimise capital losses by way of negligible value claims (in appropriate circumstances), or by ensuring that the "10% rule" or the "12-months" rule is not met
• Optimise the exemption by ensuring that all the criteria are met in connection with a proposed disposal.

Disclaimer

These notes are not intended to be exhaustive and they should not be regarded as such. Neither do these notes offer specific advice. They are merely an outline of the subject matter.

No liability will be accepted in respect of actions taken or refrained from as a result of information given herein. Specific professional advice should always be obtained.

Copyright Parmentier Arthur Group Limited: may not be reproduced without permission.