Substantial Shareholding Exemption (SSE)
Overview 📘
The Substantial Shareholding Exemption (SSE) applies when a company sells shares in another company (referred to here as the “parent” and “child” companies).
Normally, a corporation tax charge of up to 25% would apply to gains made on the sale of a company or assets of a company. Under SSE, the capital gain is fully exempt and no tax is due.
The funds received which remain within the group are tax free until they are paid out (i.e. through a dividend), or reinvested in a new venture. SSE is very helpful where a group has more than one activity which might be sold separately in the future.
✅ Conditions for SSE
For the exemption to apply, two main conditions must be met:
- Substantial shareholding requirement – the parent company must have held a substantial shareholding in the child company for a period of at least one year beginning no more than six years before the date of sale.
- Qualifying company requirement – the child company must be a trading company, or the holding company of a trading group or sub-group.
📊 Definition of a 'substantial shareholding'
The parent company must:
- Hold at least 10% of the ordinary share capital.
- Be entitled to at least 10% of distributable profits.
- Be entitled to at least 10% of assets on a winding-up.
This test must be met continuously for a 12-month period within the last six years.
💡 Pitfall: Different share classes (e.g. preference shares for institutional investors or VCs) may distort profit rights, even if 10% of the ordinary share capital is owned.
🔍 Definition of a qualifying company
A child company is 'qualifying' if it is:
- A trading company
- The holding company of a trading group; or
- The holding company of a trading sub-group
The qualifying period runs from:
- The start of the 12-month shareholding test, to
- The date of disposal.
The diagram below shows a timeline of events to explain this condition:
Example timeline:
- Jan 2023: Alpha Ltd buys 15% of Beta Ltd.
- Apr 2024 – Mar 2025: Qualifying 12-month period.
- Mar 2025: Alpha sells 6% (falls below 10%).
- Dec 2025: Alpha sells the remaining 9%.
- Beta Ltd must be qualifying from Apr 2024 to Dec 2025 for SSE to apply.
Subsidiary Exemptions
In addition to the above conditions, there are three subsidiary exemptions available:
- Assets linked to the shares (e.g. convertible notes or options in the subsidiary).
- Recent trading: if the subsidiary is not trading at disposal but was under parent control in the previous two years.
- Institutional investors: disposals by pension schemes, charities, or investment trusts.
Note that a subsidiary company is defined as a company that is controlled by a holding company, typically due to the parent company owning 50% or more of the subsidiary's shares.
🚫 Word of caution
This is only a high-level summary of the rules. In practice, the legislation is complex, with multiple interrelated conditions that must be considered. You should always seek detailed and specific tax advice before relying on or applying this exemption.
💡Other factors to consider
- The exemption applies to non-UK child companies, useful for tech companies growing across borders.
- If the conditions are met, relief is automatic – no claim is required.
- Losses are not available: gains are exempt, but so are losses, so they cannot be offset elsewhere.
- Negligible value claims cannot be backdated to create an allowable SSE loss.
- Special rules apply to company reorganisations: gains are exempt, but new shares are treated as acquired at market value on the takeover date.