Our client has told us that their personal company is now looking to sell the shares in the trading company.
Is the company eligible for the substantial shareholding exemption?
TCGA Schedule 7AC substantial shareholding exemption (SSE) applies for capital gains and losses on disposals by companies with substantial shareholdings in other companies. The provisions allow a gain on a disposal by a company of shares to be exempt from corporation tax on the capital gain. The downside is that any losses arising on such a disposal are not allowable.
The client has already confirmed that the subsidiary is a trading company. Finance (No 2) Act 2017 introduced flexibility for disposals on or after 31st March 2017 meaning there are no trading conditions applying to the personal company. For disposals before 1st April 2017, the investing company had to be a trading company or a member of a trading group.
To qualify for SSE, the investing company needs to have held shares for a period of at least 12 months in the six years before the share sale (two years for disposals before 1st April 2017) and (per Sch. 7AC paragraph 8)
- it holds not less than 10% of the company’s ordinary share capital.
- it is beneficially entitled to not less than 10% of the profits available for distribution to equity holders of the company; and
- it would be beneficially entitled on a winding-up to not less than 10% of the company available for distribution to equity holders
However, care needs to be taken where loans are given as it may affect the 10% beneficial entitlement in the second and third bullet points above. Paragraph 8 refers us to a modified version of the group relief rules for the purposes of applying the above conditions. An ‘equity holder’ of the company is any person who under CTA 2010 s158 holds ordinary shares in the company or is a loan creditor of the company in relation to a loan which is not a ‘normal commercial loan’ as defined by CTA 2010 s162 (see HMRC’s guidance on this definition and the conditions that must be met at CTM81010).
Therefore the availability of SSE depends on the terms of the loan made by the 90% shareholder company. If the conditions of CTA 2010 s162 are not met, then it may well be that the conditions in the second and third bullet points above are not met and SSE may not be available.
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