The Substantial Shareholding Exemption (SSE)

The Substantial Shareholding Exemption (SSE) is a significant tax relief for companies, offering the potential to avoid Capital Gains Tax (CGT) on the disposal of certain shares. This exemption plays a key role in enabling businesses to restructure, sell shares in subsidiaries, or engage in mergers and acquisitions without incurring excessive tax liabilities. In this blog, we’ll explain how SSE works, who qualifies for it, and how it can benefit your business.

Table of Contents

• What is the Substantial Shareholding Exemption (SSE)? 

• Key Requirements for Substantial Shareholding Exemption 

• Subsidiary Exemptions under SSE 

• Who Can Benefit from SSE? 

• Key Benefits of SSE for Businesses 

• Examples of How SSE Works in Practice 

• Maximising the Benefits 
  

What is the Substantial Shareholding Exemption (SSE)?

SSE is a UK tax relief that exempts capital gains on the disposal of shares in trading companies from being subject to Capital Gains Tax (CGT), provided certain conditions are met. When businesses meet the necessary requirements, SSE automatically applies, so they don't need to file a separate claim to benefit. Both UK-based and foreign companies can use SSE, making it a versatile tool for cross-border transactions.

Importantly, SSE applies not only to share disposals in UK companies but also to disposals involving foreign companies. This versatility makes it a valuable relief for multinational businesses engaged in international trading activities.

Key Requirements for Substantial Shareholding Exemption

To take advantage of SSE, both the investing company (the seller) and the investee company (the company whose shares are being sold) must meet specific criteria. These conditions help ensure that only genuine business disposals, as opposed to short-term speculative investments, qualify for the exemption. 

1. Substantial Shareholding Requirement The investing company must hold at least 10% of the voting rights or ordinary share capital in the company it is disposing of. This requirement ensures that SSE is available only for significant shareholdings, generally indicating a long-term investment. 

2. Trading Company Status Both the investing company and the company it sells must qualify as trading companies or be part of a trading group for SSE to apply. A company qualifies as a trading company if it primarily engages in trade, with non-trading activities making up no more than 20% of its operations. This includes measuring factors like turnover, assets, and the time dedicated by employees to trading activities. 

3. Ownership Period The investing company must hold the shares for at least 12 months within the two years before the sale. This requirement ensures that only long-term investments qualify for the exemption, preventing short-term traders from benefiting from SSE.

When these conditions are met, SSE applies automatically, relieving the business from the tax burden associated with the capital gains from the disposal. 

Subsidiary Exemptions under SSE

Beyond the main SSE exemption, there are three subsidiary exemptions that apply in specific scenarios: 

1. Exemption for Options and Convertible Securities If the investing company holds options, convertible securities, or options on convertible securities related to the shares in question, SSE may apply to the disposal of these rights, provided the main conditions of SSE are satisfied. 

2. Exemption for Previously Qualifying Shares This exemption applies if the investing company has previously met the SSE requirements but the company being sold no longer qualifies as a trading company at the time of the disposal. If the conditions for the main exemption were met earlier, the tax relief can still apply. 

3. Exemption for Qualifying Institutional Investors The third subsidiary exemption applies to institutional investors like pension schemes, sovereign wealth funds, and charities. These investors may qualify for SSE even if the investee company is not a trading company. Additionally, these investors can benefit from SSE in the event they hold a substantial interest in the company (more than 10% of the shareholding). 

Who Can Benefit from SSE?

SSE provides significant advantages for a wide range of businesses and investors. The following groups may benefit from SSE: 

• Corporate Groups: Parent companies that own substantial shareholdings in subsidiaries can dispose of these shares without facing CGT, making SSE a valuable tool for corporate restructuring and group reorganisations. 

• Institutional Investors: Pension schemes, life assurance companies, and similar institutional investors can benefit from SSE, particularly under the third subsidiary exemption, which enables these entities to sell shares in non-trading companies with tax relief. 

• Multinational Businesses: Since SSE applies to disposals involving foreign companies as well as UK companies, it is a highly beneficial relief for businesses involved in international trade or cross-border mergers and acquisitions. 
  

Key Benefits of SSE for Businesses

1. Encourages Long-Term Investment By offering tax relief on the disposal of substantial shareholdings, SSE encourages companies to make long-term investments in other businesses. This makes it easier for businesses to sell non-core subsidiaries or restructure their operations without facing a significant tax liability. 

2. Facilitates Mergers and Acquisitions SSE can play a key role in mergers and acquisitions (M&A) by allowing companies to dispose of shares in subsidiaries or other trading companies without paying CGT. This reduces the tax burden on such transactions and makes them more financially viable, encouraging corporate growth and restructuring. 

3. Attracts International Investment Since SSE applies to both UK-based and foreign companies, it attracts international investors. Foreign investors can benefit from SSE when selling shares in UK companies, while UK companies can also dispose of shares in foreign subsidiaries tax-free, making it an essential tool for multinational businesses. 

4. Promotes Efficient Capital Allocation SSE enables businesses to dispose of shares without incurring a tax charge on any capital gains, freeing up capital for reinvestment. This flexibility encourages businesses to reinvest in new opportunities, acquisitions, or expansions, thus supporting overall business growth. 

5. Hive-Down Provisions for Business Transfers The ‘hive-down’ provisions allow a company to transfer a trading asset to a new subsidiary and then sell the shares in that subsidiary, while still benefiting from SSE. This provision is especially useful for group restructuring and for companies looking to sell off certain parts of their operations. 
   

Examples of How SSE Works in Practice

• Corporate Restructuring: A parent company sells its substantial shareholding in a subsidiary. If the subsidiary is a trading company, the parent company can benefit from SSE and avoid CGT on the capital gain. Learn more about how SSE impacts corporate restructuring in this Financial Times article.

• Mergers and Acquisitions: A UK-based company involved in an international acquisition sells shares in a foreign trading subsidiary. SSE allows the company to dispose of the shares without paying CGT on the gain, making the acquisition more tax-efficient. 

• Institutional Investors: A pension fund holds more than 10% of the shares in a trading company and decides to sell its interest. SSE applies, and the fund benefits from exemption from CGT on the gain from the sale. 
  

Maximising the Benefits

The Substantial Shareholding Exemption provides important tax relief for businesses engaged in share disposals, mergers, and acquisitions. It reduces the tax burden on the sale of shares in subsidiaries and trading companies, encouraging long-term investment and facilitating corporate restructuring. Whether you are a parent company, a group of companies, or an institutional investor, SSE can provide substantial tax benefits. 

If your business is considering the sale of shares in a subsidiary or a reorganisation, seeking professional advice is crucial to ensure you qualify for SSE and maximise its benefits. At ASWATAX, our expert team can guide you through the SSE process, helping you make your business transactions more efficient and tax-effective. Contact us today for a consultation and take the next step toward optimising your tax strategy!

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.