How does the Substantial Shareholding Exemption help your business sale?

When selling your limited company, you want to do so in the most tax-efficient way possible. Making use of the Substantial Shareholding Exemption (SSE) is one way to do this.

Let’s dive in and see how the SSE limits the corporation tax you pay on any capital gains.

Why should I consider the Substantial Shareholding Exemption when selling up?

Selling a business that’s operated through a limited company means thinking about what you’re actually selling. As the vendor, you’ll usually prefer to sell the shares, whereas the purchaser will often prefer to buy the trade (the goodwill and other assets held by the company).

Although there are other considerations, with one of the main issues being a wish on the part of the purchaser to avoid exposure to any legacy issues that may not be readily apparent. One way to square that circle is through a particular use of the SSE.

How does the SSE actually work?

SSE exempts from tax any capital gain on the sale of shares by a company, but not by an individual. To achieve this, you need to make sure that certain key conditions are met.

So, how does this work in practice?

Making use of the specific benefits of the SSE requires the existence of a group structure so that one company owns shares in another. The company (Seller) making the disposal must be a trading company or a member of a trading group, and the company (Target) whose shares are being sold must be a trading company or the holding company of a trading group, and ‘Seller’ must have held at least 10% of the shares in Target for at least 12 months prior to the disposal.

Presuming that the trading company is not already in a group, the easiest way to form a group is to set up a dormant subsidiary. This subsidiary can sit there doing nothing until you, as the owners, want to sell up.

At the point that you decide to sell the business, the trade can be transferred down to the subsidiary (or even a brand-new subsidiary). This shields that entity from any potential legacy issues. The shares in that ‘clean’ company can then be sold, with the gains being tax-free due to the benefits of making use of the SSE.

What are the main advantages of making use of the SSE in this way?

If your potential purchaser is concerned about legacy issues that may affect the entity being acquired, this can reduce the value of, or even block, any potential deal. To protect your deal – and reduce the risk for your purchaser – using the SSE is the way to go.

There are two core benefits:

• Setting up a dormant subsidiary in the way we’ve outlined allows you (the vendor) to take advantage of the likely capital gains tax advantages of disposing of shares rather than the trade.
• At the same time, by using the SSE and a subsidiary company within the group, the purchaser is protected from any legacy issues that may otherwise affect the deal.

Talk to us about planning for a business sale

The SSE rules are complex, and this is a very brief summary of the key points.

If you operate a trading company that’s not already in a group structure, forming a group may well allow significant tax savings if the business is sold later. This group structure and dormant subsidiary does need to be set up well in advance to take advantage of the SSE benefits.

Talk to us about the structure of your business activities so we can advise you on the best ways to structure the business and your company interests.

Apart from SSE considerations outlined above, there can be asset protection advantages of setting up a holding company to hold assets above the trading company. There are also other strategies such as linked investment companies to deal with non-trade activities such as property rental.