Where the Substantial Shareholdings Exemption (SSE) applies on a sale by a company of its investment in another company, the SSE provides exemption from corporation tax – not just on the sale itself but also from any ‘degrouping charge’ except where the subject of the ‘degrouping’ charge is an intangible asset. Until FA 2019 that is – as Ken Moody explains.
To set the scene, the SSE (Schedule 7AC TCGA 1992) applies where a company disposes of shares in another company which comprise not less than 10% of the company’s equity (and also 10% of the profits available for distribution or assets available for distribution on a winding up).
The shares must basically have been held for at least 12 months and until recently each company (i.e. the investor and the investee company) had to be a trading company or a member of a trading group both before and after the sale. This requirement as regards the investor company was removed by F(No2)A 2017 from 1 April 2017 and in fact there are now no requirements at all as regards the investor company. This solved the problem for example where the holding company of a trading group sells its only or last remaining subsidiary and by doing so ceases to be a member of a trading group.
The investee company also had to be a trading company of holding company of a trading group or sub-group both immediately before and after the disposal. The post disposal requirement was also removed from 1 April 2017, unless the disposal is to a connected person.
For the purposes of this article it is also relevant that the SSE covers any ‘degrouping’ charge which arises under s.179 TCGA. Broadly, a degrouping charge arises when a company (‘Company A) leaves a group owning an asset for CGT purposes which it acquired from another group member within the last six years. Essentially, the asset is deemed to have been disposed of by Company A and reacquired at market value and therefore a chargeable gain (or loss) arises in Company A. However, where Company A leaves the group as a result of a share disposal the deeming rule does not apply and instead the gain or loss is accrues in the company disposing of the shares (s.179(3D)). In that case the gain or loss is added to or subtracted from the consideration for the disposal of the shares.
Since any gain or loss on disposal of the shares in Company A is exempt where SSE applies, this will automatically also exempt any degrouping gain/loss, which was all well and good unless the asset in question was an intangible asset.
The intangible assets rules in Chapter 9, Part 8 CTA 2009 also contain degrouping rules similar to the CGT degrouping provisions, but no provision similar to s.179(3D) above and so the degrouping charge accrues in ‘Company A’ (s.780 CTA 2009). FA 2019 inserts a new s.782A so that, with effect from 7 November 2018, where a company leaves a group in circumstances where the SSE applies, s.780 is simply disapplied and so no degrouping charge arises.
The anomaly whereby a degrouping gain under s.179 is exempt where SSE applies whereas a degrouping gain under s.780 is chargeable, has been a bugbear for some years and was often an obstacle to commercially-motivated mergers and acquisitions. There was no apparent rationale for this and so this is a very welcome reform.
The definitions of ‘trading company’, ‘trading group’ and ‘trading sub-group’ for SSE purposes (paragraphs 20-22 Schedule 7AC TCGA 1992) are similar to the definitions in s.165A TCGA which apply for ‘gift relief’ under s.165 and ‘entrepreneurs’ relief under s.169I, whereby the activities of the company/group must not include non-trading activities “to a substantial extent”. As readers familiar with those reliefs will be aware HMRC interpret “substantial” meaning more than 20% by reference to a number of indicators (see CG53116)