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Autumn Budget 2017: Extension of Substantial Shareholding Exemption (SSE) to real estate companies

Autumn Budget 2017: Extension of Substantial Shareholding Exemption (SSE) to real estate companies

  • United Kingdom
  • Real estate
  • Tax planning and consultancy - Budget


This exemption may take some investors outside the new CGT charge on indirect disposals

What’s new?

Swamped by the latest announcements in the Budget on CGT and corporation tax changes for non-residents investing in real estate, in a little known amendment to existing rules, the substantial shareholding exemption from corporation tax on chargeable gains (SSE) has been extended to certain companies holding substantial interests in real estate investment and other non-trading companies. This change came into force in the new Finance (No.2) Act 2017, which became law on 16 November 2017.

Historically, SSE applied only, very broadly, to trading companies or groups holding a 10% or more interest in ordinary shares in certain trading companies, where the shares had been held for a period of at least 12 months in the last 2 years. (The detailed consideration of the general rules is beyond the scope of this note.)

SSE was extended, in Finance (No.2) Act 2017, with retrospective effect to 1 April 2017, to disposals by a qualifying company (an “investing company” – see below) which:

  • has invested £20m or more (on acquisition) in the ordinary shares of another company (such shares could be acquired in more than one tranche);
  • is beneficially interested in a share of the profits available for distribution and the income and assets available on a winding up of that company (at least proportionate to that which would be available to equity holders of the company); and
  • has held its interest in that company for at least 12 months continuously in the last 6 years.

This relief is intended to help large scale investment. So the relief will apply regardless of whether the investee or investor company was trading or holding its assets as an investment.

How does it work?

The exemption operates by using a quasi look-through mechanism from the investing company making the disposal to its shareholders. The relief applies in full where 80% of the ordinary share capital is held by "qualifying shareholders". Where the qualifying institutional shareholder’s interest is between 25% and 80%, the taxable gain (or loss) on disposal is proportionately reduced. Where the exemption is not available in full, any tax will be at the level of the investing (i.e. share disposing) company, so it is anticipated that some qualifying institutional investors may seek some sort of streaming.

What other conditions are there?

The relief is not, however, available to all companies. It is limited to qualifying companies with a certain proportion of “qualifying institutional shareholders”.

“Qualifying institutional shareholders” are, broadly, UK or overseas registered pension schemes (other than investment-regulated pension schemes), a life assurance company holding its interest for the purpose of providing benefits to policy holders in the course of that business, sovereign wealth funds, charities, authorised investment funds and exempt unauthorised unit trusts, which are diversely-owned.

In particular, the relief will not apply if any of the shares in the investing company itself are listed on a recognised stock exchange, unless it is either:

  • a UK REIT only by reason of being “non-close” under the qualifying institutional investor test or by reason of being controlled by or on behalf of the Crown (so not all REITs); or
  • a qualifying institutional shareholder, as defined above.

Similarly, the investment has to be in another “company”.

Technically, this relief would only appear to apply where the entity invested in has “ordinary share capital” and is a "body corporate". Our understanding is that HMRC’s current view is that the relief would not, therefore, apply to deemed companies for CGT purposes, such as JPUTs and other contractual vehicles, as they do not satisfy this. Clarification will be sought from HMRC as to whether the relief will be extended to these vehicles in the course of the CGT consultation process.

On the plus side, the consultation on CGT does acknowledge that the new SSE relief should continue to apply to disposals of interests by offshore companies, which is good news.

Please view our dedicated Autumn Budget 2017 hub here. It will give you access to our watch list, our contributors and relevant articles and tweets.

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