Substantial Shareholdings Advantages And Disadvantages

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Page 7: Disposal of substantial shareholdings
Where a trading company owns shares in another trading company, there is an exemption on disposal if 10% or more of the shares are held.
Exemption from corporation tax for any gain arising when a trading company disposes of the whole or any part of a substantial shareholding in another trading company.
A substantial shareholding is one where the investing company holds at least 10% of ordinary share capital and is beneficially entitled to at least 10% of the :
Profits available for distribution to equity holders
The 10% test must have been met for a continuous twelve month period during the two years preceding the disposal.
The twelve month period condition can also be satisfied by including a period during which assets which are being used in its trade by the company whose shares are being disposed of (Company A) were being used in the trade of another group company (Company B) and then transferred to Company A before the sale of the Company A shares.
This enables the exemption to apply in the situation where an existing trade carried on by one group company is transferred to a new group company before that new company is sold outside the group.
The exemption is given automatically and cannot be disclaimed. This means that as well as exempting gains, it denies relief for losses.

Example: Disposal of substantial shareholding
On 1st December 2007 SD ltd bought 20% of the shares in AM Ltd. The shareholding qualifies for the substantial shareholding exemption. During its accounting period to 31.02.2015, SD Ltd made the following disposals:
30 June 2014 it disposed of a 15% holding in AM Ltd
30 December 2014 it disposed of the remaining 5% holding in AM Ltd.
Both of these shareholdings qualify for the substantial shareholdings exemption. Clearly the first disposal is of at least a 10 holding which was held for twelve months prior to disposal. The second disposal also qualifies despite being only a 5% holding, because SD Ltd owned a 10% holding throughout a twelve month period beginning in the two years prior to this second disposal.
Rollover relief
Relief for replacement of business assets is available to companies to defer gains arising on the disposal of business assets
A gain may be rolled over by a company where the proceeds on the disposal of a
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