Schedule 19 Finance Act 2011: Substantial Shareholding Exemption (SSE)

Schedule 19 of the Finance Act 2011 made significant amendments to the Substantial Shareholding Exemption (SSE) regime in the UK. The SSE provides an exemption from corporation tax on capital gains arising from the disposal of shares in a trading company or a holding company of a trading group. The aim of these changes was to simplify the rules, reduce complexity, and make the UK a more attractive location for holding companies.

Prior to the 2011 amendments, the SSE rules were intricate and often required businesses to navigate a maze of conditions relating to both the investing company and the company whose shares were being sold (the "investee company"). The perceived complexity hindered investment and potentially drove businesses to locate their holding companies elsewhere.

The key changes introduced by Schedule 19 involved alterations to the conditions that needed to be met for the exemption to apply. A crucial aspect was the simplification of the trading requirement for both the investing company and the investee company.

Specifically, the post-disposal trading requirement for the investee company was relaxed. Under the old rules, the investee company had to remain a trading company (or a holding company of a trading group) for a continuous 12-month period *after* the disposal. This was considered a major impediment, as it placed a constraint on the acquirer of the shares and limited the seller's ability to restructure its business immediately after the sale. Schedule 19 removed this post-disposal trading requirement altogether. This removal provided greater flexibility for businesses and made the SSE a more appealing incentive.

Another important modification concerned the substantial shareholding requirement. The minimum holding period required to qualify for the SSE was maintained at 12 months, but the method for calculating the percentage of shares held was altered. The aim here was to clarify and simplify the calculation, reducing the potential for disputes with HM Revenue & Customs (HMRC).

In addition to these major changes, Schedule 19 also included a number of smaller amendments aimed at clarifying specific aspects of the SSE legislation. These changes addressed technical ambiguities and aimed to provide greater certainty for taxpayers seeking to rely on the exemption.

In summary, Schedule 19 of the Finance Act 2011 represented a significant overhaul of the UK's Substantial Shareholding Exemption. By simplifying the trading requirement, removing the post-disposal trading condition, and clarifying other aspects of the legislation, the changes aimed to make the UK a more attractive location for holding companies and to encourage inward investment. These amendments were generally welcomed by businesses and tax professionals as a positive step towards a more competitive and streamlined tax regime.