As announced as part of the 2016 Budget, a consultation, which will run to 18 August, has been published on possible reforms to the SSE to make it “simpler, more coherent and more internationally competitive”. More generally, views are being sought as to what role the existing (or a reformed) SSE plays in making the UK an attractive holding company jurisdiction.
The consultation’s proposals range from technical changes to the existing SSE, to a more radical replacement of the SSE with something more akin to the “participation regimes” found in other EU member states. There are 5 options for possible reform, in descending order of magnitude of change:
- a new, wider-ranging exemption: the government has said it is willing to consider a more comprehensive exemption for “substantial” share disposals, with fewer conditions regarding the companies involved. Any new exemption should not, however, apply to ordinary “trading” disposals. Nor should it allow for tax-free transfers of enveloped passive assets (eg land and IP)
- amend the SSE so that only the investee company must meet the “trading” test: as a “significant simplification” of the existing SSE, this option would mean that whilst – for SSE to apply – the company (or sub-group) being disposed of must be a trading company or sub-group, this condition would no longer apply to the company making the disposal. In other words, SSE could be available to a non-trading company/group disposing of a trading company/group
- amend the SSE to impose some other test on the investee company: the government has asked for views on whether an investee-level test other than “trading” would serve to ensure that the SSE only exempts the sort of gains that fall within the scope of the current regime. Three approaches have been suggested, all relating to the activities of the company (or sub- group) being disposed of, which would allow for (i) other business activities, (ii) significant management functions of investment companies, and (iii) certain activities to be prescribed in legislation to also result in availability of SSE relief
- retain (amended) SSE tests at both investee and investor level: if there are compelling reasons to retain SSE requirements applicable to both the company disposing and the company being disposed of, the government has proposed either (i) limiting the “trading” test to consider only the immediate companies concerned (rather than the wider group/ sub-group), or (ii) expanding the definition of “qualifying” activities to include the type of activities discussed as part of option 3 above
- amend the definition of “substantial shareholding”: finally, the government has proposed lowering the existing 10% ordinary share capital requirement. Although the consultation states that the government is sceptical as to the merits of lowering the threshold, it does implicitly recognise that there may be occasions under the current SSE where an exemption for gains on large and long-term shareholdings is not allowed as the 10% threshold is not met. By way of example it refers to significant infrastructure projects where a less than 10% shareholding “may still represent multiple billions of invested capital”.
Various combinations of these options (aside from option 1) are also possible, according to the consultation document.
The document also considers, amongst other things, possible reform of the SSE to provide exemption for indirect holdings of sovereign wealth funds and pension funds, and to holdings through tax transparent fund structures.
The consultation document can be viewed here.