UK: "Substantial Relief For Substantial Disposals - The New Proposals"

Last Updated: 22 November 2001
Article by Andrew Farquharson

The current position:

At present, where a UK company sells an investment in another company and realises a profit, that profit is liable for tax as a capital gain at a rate of 30%. No relief is available if the profit achieved is re-invested. However, in July 2001 HM Treasury and the Inland Revenue issued a joint consultation document detailing revised proposals for a new tax relief for companies disposing of substantial shareholdings- Large Business Taxation: The Government’s strategy and corporate tax reforms- a consultation document (available at www.hm-treasury.gov.uk or www.inlandrevenue.gov.uk). The government intends any such relief only to apply to shares and not to any other securities. Legislation implementing the new relief is expected to be introduced in the Finance Bill 2002.

A "substantial shareholding":

The proposals envisage that a substantial shareholding would be defined as a beneficial entitlement to at least 20% of the investee company’s ordinary share capital, distributable profits and distributable assets (as amplified by the rules in Schedule 18 of the Income and Corporation Taxes Act 1988).

Where the qualifying shareholder company is a member of a trading group, it may be possible to take into account other group members’ beneficial interests in the qualifying investee company when determining whether the shareholding is a substantial shareholding. Aggregation of members’ interests would be possible at any time when the shares could be transferred between them on a no gain/ no loss basis under the Taxation of Chargeable Gains Act 1992.

The new proposals:

Whilst the government has already considered introducing deferral relief for companies that dispose of a substantial shareholding and reinvest the proceeds in a replacement shareholding, the new consultation document contains an alternative proposal- exempting gains and losses arising from disposals of substantial shareholdings altogether.

Deferral relief v Exemption relief:

The fundamental difference between the proposed exemption relief and deferral relief is the method by which relief is given. An exemption relief would apply automatically and would make any gains achieved tax free, although losses would be unallowable. A company could only take advantage of deferral relief on the other hand where it reinvested the disposal proceeds in a replacement shareholding. The tax charge arising on gains would be delayed and losses would remain allowable.

The practical implications?:

  • The introduction of a relief for disposals of substantial shareholdings may encourage vendor companies to structure business disposals as share, rather than asset sales. At present, companies are able to obtain deferral relief on gains arising from business asset disposals under s152 of the Taxation of Chargeable Gains Act 1992 where the company reinvests the proceeds of the disposal in replacement business assets. Sellers have consequently preferred to dispose of businesses rather than shares in any subsidiaries. Clearly the introduction of a new relief for disposals of substantial shareholdings may reverse this pattern. A share sale as opposed to a business sale is advantageous both to the seller as it is an effective "clean break" and to the purchaser, as a share sale may result in a lower Stamp Duty charge where the assets involved are real property or goodwill. For the purchaser the fact that it will assume the liabilities of the company it is buying may still act as a deterrent.

  • Large listed companies which own substantial shareholdings in other listed companies are able to achieve a profit on disposal without suffering immediate taxation by issuing exchangeable bonds. Such structures may be encountered less frequently.

  • In order to obtain the maximum benefit of the relief companies intending to dispose of a subsidiary will need to carefully structure the disposal. The substantial shareholding must be held for a period of 12 consecutive months. This can fall at any time during the 2 years preceding the disposal. In order to fulfil this proposed 12 month ownership requirement, the parent company would have to transfer the businesses to be retained to another company within the Group, leaving only the businesses to be sold in the subsidiary, allowing the subsidiary itself subsequently to be sold.

  • It may be advantageous for groups considering the disposal of companies standing at a gain to defer the disposal, awaiting the introduction of the new relief.

  • As it appears that the government favours the introduction of an exemption relief, rather than a deferral relief, companies intending to dispose of any subsidiaries resulting in a capital loss should consider hastening the disposal, thereby avoiding the crystallisation of non-allowable losses.

Conclusion:

The substantial shareholdings relief, combined with the UK’s relatively low rate of corporation tax, form part of the Government’s strategy for making the UK a more competitive environment for multinational companies to locate. Deferral relief would seem to be more generous than exemption as the latter would deny relief for losses. Exemption relief would be administratively simpler. Exemption would also align the UK’s corporation tax system with that of many other European Union states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.