In some circumstances, delaying the sale for a few months could result in significant tax benefits and the drive for simplicity and speed can be a very costly exercise.
M Group Holdings Limited recently found this out when their case went to the upper tribunal ([2023] UKUT 213 (TCC).
Typically, the SSE exempts gains on sales of shareholdings in trading companies, provided that at least 10% of its ordinary share capital has been owned for at least 12 months. This one-year holding requirement, can be achieved where a group company transfers a trade to a new subsidiary. In that scenario, the legislation allows the one-year requirement to be met by combining the time the new subsidiary was trading with the time the transferor had owned shares. It is imperative that group exists for 12 months.
SSE can apply to any resulting degrouping charge such that this is also exempted from tax.
The taxpayer in M Group Holdings Limited v HMRC sought to rely on these extended SSE rules. Prior to a sale of part of the business, M Group Holdings Limited established a subsidiary, and three months later transferred trading assets to it for sale (as in the above example).
The issue was that the “group” was not a group before that subsidiary was established. It was simply a standalone company.
For the sale to qualify for SSE, the group condition had to be met for 12 months (not 11 months as was the case in M Group Holdings).
At the FTT, HMRC maintained that the provisions would apply to extend the investor's duration of ownership but only the extent that the investing Company was a part of a group. Because that merely extended the time of ownership for 11 months, the SSE conditions were not met, and HMRC held that SSE could not be applied.
The FTT ultimately agreed with HMRC.
In this particular case, this failure to satisfy the conditions for SSE is likely to cost over £10m in tax which could have been entirely exempt from tax had SSE applied.
Had M Group Holdings Limited simply created a dormant subsidiary and held it for 12 months before transferring trading activities to it for sale, SSE could have been available.
Exit planning should be at the forefront of business owners to do list. Although the commercial drivers will usually dictate the timing of a sale, the tax implications for sellers are also a significant factor to consider in determining when to sell a company to achieve optimum tax efficiency.
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