Substantial shareholding exemption

The substantial shareholding exemption exempts the disposal of certain shares in subsidiaries from corporation tax on any capital gain.

Most practitioners will be aware of the generous entrepreneur's relief available for individuals and trusts for capital gains tax purposes and that this is not available for companies. Less well known  is the substantial shareholding exemption for companies. 

What is the substantial shareholding exemption?

The substantial shareholding exemption was first introduced by Finance Act 2002 and the provisions have now been inserted into the Taxation of Chargeable Gains Act (TCGA) 1992, Schedule 7AC

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. 

When does the exemption apply?

The substantial shareholding exemption legislation is quite dense and there are a number of conditions that must be satisfied for the exemption to apply. A look at the legislation is therefore highly recommended when considering whether or not the exemption applies. 

Broadly speaking, the exemption applies where the gain arises from:

  • the investor company making the disposal must be a trading company or a member of a trading group, and
  • the investee company must be a trading company or the holding company of a trading group (or subgroup), and the investing company held a 'substantial shareholding' (broadly, at least a 10% interest) investee company, and
  • the shares were part of a total holding of at least 10% held for a continuous 12 month period beginning not more than two years before the disposal. If the shares are disposed of piecemeal then provided that this condition is met, a disposal of less than 10% can still be eligible for the exemption. 


This is illustrated by the following example:

Abbas Ltd acquired 3,000 ordinary shares in Trading Ltd in April 2006.  Trading Ltd has a total of 20,000 ordinary shares in issue. 

Abbas Ltd makes the following disposals of Summer Ltd shares.

31 January 2013 - 1,200 shares  

30 September 2013 - 800 shares  

28 February 2014 - 1,000 shares

The effect of the disposals for the purpose of corporation tax on chargeable gains is as follows. 

31 January 2013 disposal

Abbas Ltd held at least 10% of the ordinary share capital of Trading Ltd throughout the two years prior to the disposal. The disposal is therefore part of a substantial shareholding and no chargeable gain or allowable loss would arise on the disposal. 

30 September 2013 disposal

Although Abbas Ltd did not hold at least 10% of the shares in Trading Ltd immediately before the disposal, there is a twelve-month period beginning within two years prior to the disposal throughout which it did hold at least 10%.  The substantial shareholding exemption therefore applies and no chargeable gain or allowable loss would arise on the disposal. 

28 February 2014 disposal

Abbas Ltd holds only 5% of the share capital of Trading Ltd immediately before the disposal. In the two year period prior to the disposal, from 1 March 2012 to 28 February 2014, the company held at least 10% of Trading Ltd's shares only from 1 March 2012 to 31 January 2013, i.e. 11 months. As this is not a continuous twelve-month period beginning two years prior to the disposal, the substantial shareholding exemption will not apply and a chargeable gain or allowable loss will therefore arise. 

Other notable points:

  • for the purposes of the substantial shareholding exemption, a trading company is regarded as a member of a group if there is a 51% relationship;
  • the exemption does not apply if the transaction would otherwise be regarded as a nil gain/nil loss disposal;
  • the exemption is automatic and a claim does not need to be made;
  • the exemption also applies to ‘assets related to shares’. This broadly means an option to acquire or dispose of shares in the investee company or a security that is convertible or exchangeable into shares or option in the investee company; although, again, a look at the legislation would be advisable to ensure that all relevant conditions are met. 

Further guidance on the substantial shareholding exemption is available in HMRC's manuals (visit the 'related links' section of this page for further information).