Don’t go it alone – substantial shareholdings exemption (SSE)

SSE is a valuable tax relief that applies when a parent company sells a substantial shareholding, generally 10% or more, in a trading company that is has held for at least 12 months in the 6 years before disposal. Under SSE any gain (or loss) on sale of the shares is exempt from UK tax.

SSE is also important with “pre-sale hive downs”, where assets are transferred to a new subsidiary before being sold to a purchaser.  Although the subsidiary may be newly formed, the time that the hived down trade and assets were previously used in a trade by a member of the corporate group counts towards the 12-month holding period.  This means an effective sale of the trade and assets can be exempt from UK tax in the same way as if a subsidiary company had been sold.

A recent First-tier Tribunal case looked at the details of the application of SSE to a pre-sale hive down, and the importance of the phrase “previously used by a member of the group (other than the company invested in) for the purposes of a trade carried on by that member at a time when it was such a member”.

M was a stand-alone company until June 2015 when it incorporated a wholly owned subsidiary, MCS.  M transferred its trade and assets to MCS, which was then sold within 12 months.  HMRC successfully argued that M had not been a member of a group before the incorporation of MCS, therefore, the period the assets were used in the trade of M before the hive down could not be taken into account.  Therefore, SSE was not available for the sale of MCS –  giving rise to a significant tax charge.

SSE would have been available if M had been in a group for 12 months before the hive down, or the new subsidiary was held for at least 12 months before it was sold.

As a simple planning idea, stand-alone companies could look to form a dormant subsidiary now, so SSE would be available on a pre-sale hive down in future, if needed.  There is very little downside but significant potential upside to this simple idea.

SEIS and EIS

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are similar schemes that offer very valuable tax reliefs for investors subscribing for shares.

These government schemes are designed to encourage investment into young companies which may find it difficult to obtain other financing. Certain activities such as financial services, leasing and property-based activities cannot qualify for SEIS or EIS. A company can claim under both schemes, provided SEIS is claimed first. The rules are very complicated and there are many qualifying conditions to meet, but the benefits to attracting potential investors are worth the effort.

SEIS – the first 2 years

 SEIS is designed for start-up companies who began trading in the last 2 years. The maximum a company can receive as SEIS investment is £150,000. The maximum an individual can invest in shares under SEIS is £100,000 per tax year.

Investors could be wider family and friends or even one of the founder shareholders (if they hold less than 30% of the shares).

Tax breaks for the investor

  • Income tax relief of 50% of the amount subscribed for the shares
  • The shares are exempt from CGT on sale, if they have been held for 3 years
  • If the investor has sold another asset at a gain and invested the proceeds in SEIS shares, they can treat a maximum of 50% of that gain (up to £50,000) as exempt from CGT.

EIS – the first 7 years (or longer!)

EIS is targeted at companies that began trading in the last 7 years, or a longer period for knowledge intensive companies or those raising funds for a major new trading activity.

The maximum investment in EIS shares a company can receive is £5m per year or £12m in total, these limits are higher for knowledge intensive companies.  The maximum an individual can invest in EIS shares is £1m per tax year.

Tax breaks for the investor

  • Income tax relief of 30% of the amount subscribed for the shares
  • The shares are exempt from CGT on sale, if they have been held for 3 years
  • If the investor has sold another asset at a gain and invested the proceeds in EIS shares, they can defer paying CGT on that gain until the EIS shares are sold.

HMRC assurance

As there are so many qualifying tests to be met, seeking advance assurance from HMRC is important to give investors’ confidence that SEIS/EIS will be available. This process often takes around 4 weeks.

 

Get In Touch

GET IN TOUCH

Get in touch with one of our experts today