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Substantial Shareholding Exemption – upheaval?

Substantial Shareholding Exemption – upheaval?

Business Tax

HM Treasury consults on amending the SSE provisions. It published the consultation document on 26 May 2016.

The consultation document proposes a number of possibilities for reform, including:

  • a comprehensive wide-ranging exemption on share disposal gains;
  • the removal of the investor trading test;
  • the removal of the investor trading test plus expansion of the investee trading test;
  • the expansion of both investor and investee trading tests; and
  • a reduction in the substantial shareholding requirement.

These options largely reflect the main weakness that has been identified in the SSE when compared with participation exemptions in other jurisdictions. This weakness is the uncertainty caused by the trading requirements for both the selling company and the company whose shares are being sold, particularly as there is no legislative definition of "trading activities".

In particular the consultation is looking for examples of situations where the SSE has not been available but might have been expected to be. The general aim is to incentivise businesses to locate their holding companies in the UK, safe in the knowledge that their substantial investments in other trading companies will not be taxed on disposal.

Based on our review of the consultation, we consider the amendments are likely to make the application of SSE wider, potentially to include partnerships and fund structures.