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SSE: Hiving down before a sale deemed ineffective

Posted on 28 May 2021

Simplicity is good but sometimes it comes at a cost, as a taxpayer recently found out in the case of M Group Holdings Limited v HMRC (TC/2019/04839) when losing their claim for tax relief under the substantial shareholding exemption (SSE).

The case involved the sale by a company of a subsidiary that it had formed less than a year before, to which the company had transferred part of the trade it had carried on for many years. The company tried to rely on the SSE to relieve the tax on that transfer.

Very broadly, the SSE exempts gains on sales of shareholdings of at least 10% in trading companies that have been held for at least a year. However, recently the one year holding requirement was effectively relaxed where a transferor company within a group to transfers a trade (or part) to a new subsidiary. In that case, the legislation allows you to add together the period that the new subsidiary carried on the trade with the period that the transferor's shares had been owned, in order to meet the one year requirement.

The First Tier Tribunal held the company lost because the subsidiary had not been in the corporate group until it was formed. Therefore, the period that the subsidiary carried on the trade did not count towards the one year holding period required for the SSE to apply.

The moral of the story is that the SSE is unlikely to apply where a company hives down a trade ahead of a sale.  In that case, it is worth considering resisting such sale (perhaps granting cross-options to a keen buyer) until the subsidiary has run the trade for at least one year. Alternatively, a corporate group should be structured from the outset as operating different activities in different companies. Of course, the best option will depend according to the facts and objectives of each case, having evaluated the options with trusted advisers.

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