Accountancy firm RSM has advised revisions to the UK’s substantial shareholding exemption (SSE) rules could offer useful tax planning options for family businesses.
The SSE has provided a complete exemption from tax on profits made by corporate shareholders on the disposal of shares in trading companies for some times, but RSM's head of tax Jim Meakin noted the SSE’s requirements have been “relatively undemanding” in most circumstances as SSE was introduced as an anti-avoidance provision, designed to prevent holding companies from claiming losses on the disposal of trading subsidiaries and investments.
Changes have been drafted to make the SSE more attractive, reflecting the desire to make the UK more appealing as a holding company location. These changes were included in the Finance Bill 2017, but were withdrawn to ensure Finance Act 2017 made its way through Parliament ahead of the general election. The Financial Secretary to the Treasury announced that a new Conservative government would include measures withdrawn from the Finance Act in a second Finance Bill later in the year, meaning they may reappear.
Despite the current uncertainty, Mr Meakin said the intended changes may well provide a wider benefit to some entrepreneurial or family businesses that dispose of their interest in corporate businesses. The revised SSE rules intend to remove the previous requirements that the company making the disposal satisfies a trading test for a qualifying period before and after the disposal. The new rules also remove a requirement for the company disposed of (or its subgroup) to satisfy a trading test immediately after the disposal.
The changes mean that a holding company may be able to dispose of all of its trading activities with no tax liability at all, but this will only be possible if there is a holding company which can be retained. Where all shareholders qualify for entrepreneur’s relief (ER) this might represent a tax saving of 10 percent, but ER is not always available and it might be attractive to families or a group of shareholders to retain the sales proceeds within a corporate environment within which dividends do not attract any tax liabilities.
Mr Meakin advised that seeking to make the most of this opportunity should be based upon careful consideration of the objectives of the shareholder group and a view of possible future tax changes, but the relaxation of the SSE requirements “appear to offer added flexibility for some shareholders”.
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