When a company sells a subsidiary, the Substantial Shareholdings Exemption (SSE) can, where the conditions are met, exempt the gain from Corporation Tax. For owners building a group with a future sale in mind, this can be extremely valuable — but the history of the group matters.
When can SSE apply?
The shares must have been held for a continuous period of at least 12 months ending no more than five years before disposal.
The important practical point is that a subsidiary sale is not automatically tax-free simply because the companies sit in the same group.
The problem with a last-minute hive-down
A buyer may only want part of a business. One solution can be to transfer that trade into a new subsidiary and sell the shares in that company — often called a hive-down. Commercially this may be clean, but a newly incorporated subsidiary may not have existed long enough to satisfy the normal SSE holding period.
What happened in M Group?
This issue was central to M Group Holdings Limited v HMRC. M Group operated a healthcare business and, because a purchaser did not want historic tax exposures in the existing company, the trade was transferred into a new subsidiary. That subsidiary was sold for approximately £55 million around 11 months after incorporation.
M Group made a gain of more than £53 million and expected SSE to apply. It argued that the earlier trading history should count because the underlying business had existed for much longer than 12 months.
The Upper Tribunal disagreed. Before the subsidiary was created, M Group was a standalone company rather than part of a corporate group. The special rules that can recognise earlier periods of group trading therefore did not solve the problem. SSE was denied, leaving a Corporation Tax liability of more than £10 million.
Why a dormant subsidiary can matter
The case highlights an unusual but useful planning point. If a company already owns a dormant subsidiary, a corporate group already exists. In the right circumstances, that historic group relationship may become relevant if a trade is later moved into another subsidiary before sale.
This does not mean retaining a dormant company guarantees SSE, or that businesses should create dormant subsidiaries purely for tax reasons. All of the relevant ownership, trading and restructuring conditions still need to be met. It does mean that striking off apparently unnecessary group companies should not always be treated as routine housekeeping.
Plan before the buyer arrives
If a sale is possible within the next few years, owners should consider what a buyer might want to acquire, how long existing subsidiaries have been held, where valuable assets and historic liabilities sit, and whether the current structure would allow part of the business to be separated efficiently.
The lesson from M Group is simple: a small structural decision made years before a transaction can have a very large tax consequence when the business is eventually sold.
Early review also gives time to consider the non-tax aspects of a restructure: contracts may need to be transferred, employees may need to move between companies, financing may need lender consent and property or intellectual property may need separate treatment. SSE should therefore form part of the wider transaction plan rather than being considered in isolation.
How Syon Tax can help
Syon Tax can review group structures, assess potential SSE eligibility and advise on pre-sale reorganisations before transaction deadlines begin restricting the available options.
