Substantial Shareholding Exemption: A Strategic Tax Planning Tool

For UK companies, the disposal of shares in subsidiaries or other group entities can trigger a significant tax bill, unless the transaction qualifies for the Substantial Shareholding Exemption (SSE). If you’re new to SSE, start with our quick explainer video. More than just a tax relief, SSE is a key planning tool in mergers, acquisitions, and corporate restructurings. 

In this article, we explore the strategic side of SSE: when it applies, how to structure for it, and why overlooking it could cost your business. 

Table of Contents

• The Spirit of SSE: Why It Exists 

• The 10% Rule – More Than Just Shares 

• Timing Is Everything: The 12-Month Rule 

• Group Restructurings: A Planning Opportunity 

• What If the Subsidiary Has Investments? 

• SSE and Losses: The Hidden Impact 

• Don’t Rely on Assumptions 

• Summary: SSE as a Strategic Lever 

• Thinking of selling a subsidiary or group company? 

The Spirit of SSE: Why It Exists

SSE was introduced to remove tax barriers when groups restructure or divest. Without it, capital gains tax would apply even when businesses simply reallocate resources or exit fully-taxed subsidiaries. 

Unlike many exemptions, SSE doesn’t require a claim, it applies automatically when conditions are met. But understanding when those conditions are truly satisfied is where many companies go wrong. 

The 10% Rule – More Than Just Shares

You may have heard that a company needs to hold at least 10% of another company’s ordinary share capital to qualify. But that’s only part of the picture. The rule also includes: 

• Voting rights

• Rights to profits

• Rights to assets on winding up

It’s important to consider how your ownership rights are structured, especially if there are preference shares, convertible debt, or different classes of shares involved. 

Timing Is Everything: The 12-Month Rule

SSE requires the 10% threshold to be held for at least 12 continuous months... Want a visual breakdown? Watch our short video on how to use SSE to pay zero Corporation Tax. But note, this is a lookback test, not a deadline. If you’ve exited the investment, but the 12-month holding period occurred in the previous six years, you could still qualify. 

Example:  Company A sells its 15% stake in Company B today. It only held that stake for 14 months, but that was two years ago. Provided Company B was a trading company at the time, and at the time of sale, SSE may still apply. 

Group Restructurings: A Planning Opportunity

SSE plays a big role in group reorganisations, especially when done for commercial, tax, or investor-driven reasons. For real-world applications, check out our guide to the Substantial Shareholding Exemption and learn how it supports group simplification and pre-sale positioning. Common scenarios include: 

• Carve-outs of trading divisions 

• Transfer of subsidiaries before a sale 

• Group simplification projects 

When managed correctly, SSE enables companies to move or sell subsidiaries tax-free, reducing costs and encouraging internal realignment. 

What If the Subsidiary Has Investments?

Here’s where things get nuanced. The trading status of the investee matters. We break it down in our SSE walkthrough video ideal if your group structure includes investment assets or dormant subsidiaries. The trading status of the company being sold (the “investee”) is crucial. If it holds investment assets or dormant entities, this could impact its classification as a trading company or trading group. 

What helps? 

• Demonstrating that investment activity is incidental to trading 

• Segregating passive assets before disposal 

• Using pre-sale reorganisation to restructure the group 
  

SSE and Losses: The Hidden Impact

One aspect often overlooked: SSE eliminates both capital gains and capital losses. If your disposal qualifies, you won’t pay tax but you also can’t use a loss to offset future gains. 

That makes timing and forecasting important. If the value of your investment has dropped, and SSE applies, the capital loss is effectively lost too. 

Don’t Rely on Assumptions

There’s a common myth that “if it’s a subsidiary, SSE must apply.” But things like minority joint ventures, complex funding arrangements, or intra-group shareholdings can muddy the waters. 

Before going ahead with a disposal, ask: 

• Has the 10% threshold truly been met? 

• Is the investee still trading (not just dormant or passive)? 

• Are there any hybrid instruments that blur ownership rights? 
  

Summary: SSE as a Strategic Lever

SSE isn’t just a tax technicality, it’s a powerful lever that can shape how businesses approach disposals, joint ventures, and corporate realignments. With the right planning, it can deliver clean exits and avoid unnecessary tax drag. 

If you’re considering a transaction, it pays to involve tax advisors early, not just to check eligibility, but to structure the deal smartly from the start. 

Thinking of selling a subsidiary or group company?

If you’re considering a transaction, it pays to involve tax advisors early not just to check eligibility, but to structure the deal smartly from the start.

💼 Get in touch with ASWATAX for tailored advice on applying the Substantial Shareholding Exemption, so your next disposal is tax-efficient, strategic, and stress-free.

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.