Part 4 of 4
This is the Finance Act 2014 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in the period 1 April 2015 to 30 June 2016. Candidates sitting Paper P6 (UK) after 30 June 2016 should refer to the Finance Act 2015 version of this article (to be published in 2016).
So far we have reviewed the definitions of a group relief group and a capital gains group together with tax planning and other issues relating to capital gains groups.
In this final part we look at the substantial shareholding exemption. This is not necessarily related to chargeable gains groups but is an important relief when considering the disposal of shares by a company.
The substantial shareholding exemption (SSE)
The SSE is given automatically where there is a sale of shares in a trading company out of a substantial shareholding and the conditions are satisfied. It should be noted that the sale must be out of a substantial shareholding as opposed to a sale of a substantial shareholding; it is not the percentage of shares sold that is relevant but rather the percentage holding prior to the sale.
The SSE exempts any gain arising on the sale of shares as well as denying relief for any loss. Consequently, it is an important exemption and its availability must be considered before chargeable gains or allowable losses are calculated.
For the exemption to be available:
- the vendor company must be a trading company or a member of a trading group, and
- the company being sold must be a trading company or the holding company of a trading group, and
- the vendor company must have owned at least 10% of the company whose shares are being sold for a continuous period of 12 months in the two years prior to the sale.
This qualifying 12-month period can include the time when the assets owned by the company being sold were used within a trade carried on by the group before being transferred to the company being sold. This extension to the qualifying period enables the SSE to apply where a trade is transferred to a new company (ie a company that has not been owned for 12 months) within a group prior to that company being sold to a third party.
AF Ltd owns the whole of the ordinary share capital of JW Ltd. AF Ltd and JW Ltd are trading companies such that if AF Ltd were to sell the shares in JW Ltd the SSE would apply. However, AF Ltd has not been able to find a buyer for JW Ltd (this may be due to the possibility of there being contingent liabilities in JW Ltd). Consequently, the trade and assets of JW Ltd are to be transferred to a newly formed subsidiary, PN Ltd, and a buyer will then be found for the shares in PN Ltd.
The transfer of the assets to PN Ltd will take place at no gain, no loss because the two companies are in a capital gains group. However, degrouping charges (see part 2 of this article) will arise on the sale of PN Ltd as it will leave the group within six years of the no gain, no loss transfers. The degrouping charges will be added to the consideration received by AF Ltd on the sale of the shares in PN Ltd.
Although AF Ltd will not have owned PN Ltd for the requisite 12-month period, the SSE will be available on the sale of PN Ltd because the assets owned by PN Ltd will have been used within a trade carried on by the group for the required period.
Where a question involves a capital gains group you should be able to anticipate the sort of additional information that may be given.
- Where a group company has made a chargeable gain, evaluate the possibility of deferral by way of rollover relief against the purchase of a qualifying asset by another group company.
- Where a group company has made a chargeable gain, evaluate any possible advantage of transferring it to another group company.
- Where a group company is to be sold consider the availability of the SSE.
- If the SSE is not available, and there has been an earlier no gain, no loss transfer, look for ways to avoid any degrouping charge.
- On the purchase of a company, watch out for pre-entry capital losses.
Note: Corporation tax issues are considered in two further articles:
- Corporation tax for Paper P6 (UK)
- Corporation tax – Group relief for Paper P6 (UK)
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.