Can the ‘substantial shareholding exemption’ apply where loan notes are received, or will the disposal be a chargeable gain for corporation tax purposes?“
A: Where a company (A) disposes of shares in another company (B) it is possible that any gain (or loss) arising will not be chargeable/relievable for corporation tax purposes under the ‘substantial shareholding exemption’ (SSE).
As per TCGA 92 Schedule 7AC, in order for the SSE to apply the company must have held a ‘substantial shareholding’ for a ‘substantial period of time’. Further, company B must be a ‘qualifying company’ throughout a specified period.
- A substantial shareholding is defined in para 8 and requires that company A holds at least 10% of the shares in company B, is entitled to at least 10% of the profits and assets in a winding up.
- A substantial period of time is defined in para 7 as a 12 month period beginning not more than six years before the date of the disposal.
- A qualifying company is as per para 19, specifically a trading company or the holding company of a trading group. The qualifying company condition must have been met from the start of the latest period for which para 7 is met until the date of the disposal
Therefore, the disposal of a 100% shareholding in a trading company which has been held for several years, as is the case here, would seemingly fall within the SSE rules and so would not give rise to a chargeable gain. Note that the rules apply automatically and that they affect losses arising in the same way as they affect gains, meaning the treatment can be a hinderance in a loss making situation.
Additional rules can apply to create deemed holding periods (paras 9 to 15A) and where the holding involves a Qualifying Institutional Investor (Paras 3A and 30A).
Note that as the shares were disposed of in exchange for loan notes, in the absence of the SSE rules the disposal would likely have fallen within TCGA 92 s.116. This treatment would have been less beneficial, as the gain arising would have been chargeable but effectively deferred until the later disposal of the loan notes, at which point tax would have become due.
However, Sch 7AC Para 4(1)(a) confirms that the SSE rules are applied without regard to s.116. Therefore, assuming the SSE rules are met in this instance, the gain will not chargeable and so there will be nothing to defer to the later disposal of the loan notes.
