Substantial Shareholding Exemption - An Overview

Certain chargeable gains made by companies can be exempt from corporation tax if the qualifying conditions of the Substantial Shareholdings Exemption are met.  An outline of these conditions is as follows:-

The main exemption

A gain accruing to a company (”the investing company”) on a disposal of shares in another company (”the company invested in”) is not a chargeable gain if the requirements are met.  It should be noted that the exemption of ‘chargeable gains’ covers both gains and losses.

The subsidiary exemptions

A gain accruing to a company (”company A”) on a disposal of shares or an asset related to shares in another company (”company B”) is not a chargeable gain if the conditions for the main exemption had been met at a time within the two years prior to disposal but are not met at the time of disposal.

Substantial shareholding requirements

The investing company must have held a substantial shareholding in the company invested in throughout a 12 month period beginning not more than two years before the day on which the disposal occurs.

A company has a ‘substantial shareholding’ in another company if it holds shares by virtue of which:-

• it holds not less than 10% of the company’s ordinary share capital, or
• it is beneficially entitled to not less than 10% of the company’s profits available for distribution to equity holders, or
• it would be beneficially entitled on a winding up to not less than 10% of the assets of the company available for distribution to equity holders.

Requirements to be met in relation to investing company and company invested in

Both the investing company and the company invested in have to be either trading companies or the holding company of a trading group.  This applies usually up to the 12 months prior to disposal and immediately after the disposal.  The terms “trading company” and “trading group” are defined in the legislation.

For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.