Tax implications for sellers often influence the optimum time to sell a company. UK corporate sellers should consider whether the substantial shareholding exemption is available to exempt a gain on sale; the potential for tax de-grouping charges; and how to maximise group relief claims, where relevant, by ensuring that a target company does not leave a loss group prematurely. Corporate sellers should also consider the position of manager sellers who might be expecting to claim business asset disposal relief, where timing is key. Delaying the sale for a matter of months could in some cases reap significant tax benefits.

Whilst fully appreciating that 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. In this article, we address the main tax considerations for UK corporate sellers and the related timing constraints.

Throughout the article, we refer to a UK corporate seller as a corporate seller, and the company being sold as a target company.

Some of the main tax considerations for a corporate seller, which can have timing implications, are:

• whether the substantial shareholding exemption (SSE) is available;
• potential tax de-grouping charges;
• how to maximise group relief claims; and
• the impact on manager sellers.

SSE

SSE is potentially the most valuable exemption for corporate sellers where they would otherwise realise a taxable gain on the sale of a company and/or crystallise a tax de-grouping charge (as discussed under the de-grouping heading below). Where SSE is available, the gain on the disposal of shares is exempt from UK corporation tax (TCGA 1992 Sch 7AC para 1).

While there are four SSE exemptions, in this article we focus on the main exemption and how it has evolved since it was introduced with effect from April 2002. The following conditions need to be satisfied:

The substantial shareholding requirement

The corporate seller must own at least 10% of the target company’s ordinary share capital. That shareholding must provide the corporate seller with a right to at least 10% of the total profits available for distribution to ordinary shareholders and certain loan note holders, and a right to at least 10% of the assets of the target company available for distribution to such ordinary shareholders and certain loan note holders on a winding up.

This 10% condition is satisfied if it is met for a 12 month consecutive period in the six year period prior to a disposal (TCGA 1992 Sch 7AC para 7). This may allow a corporate seller to undertake a phased sale of their interest, with each sale potentially qualifying for SSE, even where its interest has reduced below 10%.

SSE is potentially the most valuable exemption for corporate sellers where they would otherwise realise a taxable gain on the sale of a company and/or crystallise a tax de-grouping charge

Where at least 25% of the ordinary share capital of a corporate seller is owned by qualifying institutional investors, this 10% condition does not need to be met (a detailed review of this specific SSE exemption is outside the scope of this article). In such cases, the substantial shareholding requirement will be satisfied if the corporate seller holds ordinary shares in the target company and paid at least £20m to acquire those shares, and the corporate seller’s beneficial interest in the target company is proportionate with its shareholding (TCGA 1992 Sch 7AC para 8A).

The trading requirement for the target company

The target company must be a trading company or the holding company of trading group throughout the period beginning with the latest 12 month period for which the substantial shareholding requirement is satisfied, and ending at the time of disposal (TCGA 1992 Sch 7AC para 19). It will be a trading company or the holding company of a trading group where the activities of the company or the group, as applicable, are trading, and do not include to a substantial extent activities other than trading activities. HMRC considers substantial in this context to mean more than 20%, although HMRC have been clear that they will consider the facts and circumstances in each case.

For disposals between April 2002 and April 2017, the trading condition also had to be satisfied by the target company immediately after disposal. Since April 2017, this post-disposal trading condition has been removed except in two situations: where the disposal is to a person connected with the corporate seller, and/or where the trade has been transferred into a new group company within the previous 12 month period.

Planning opportunities

It is worth remembering that it may be possible for SSE to apply to the disposal of part of a group’s trading activity where the trading assets have been transferred to a new group company (within the same capital gains group), and for that new group company to be sold before it has itself been trading for at least 12 months (TCGA 1992 Sch 7AC para 15A).

Provided the corporate seller holds a substantial shareholding in the target company at the time of disposal, under paragraph 15A it is treated as holding a substantial shareholding in the target company in the 12 month period ending with the disposal of the target company if:

• an asset is being used for the purposes of a trade carried on by the target company at the time of disposal which was transferred to the target company from another group company; and
• that asset was previously used by a group company for the purposes of a trade carried on by that group company while part of the same capital gains group (and the overall trading period is at least 12 months prior to the disposal).

In our experience, a number of buyers, particularly overseas buyers, wish to purchase clean companies. So if a buyer only wishes to buy one established business carried on by a group company, it should be possible for that business and its assets to be transferred intra-group to a newly formed group company (the commercial consequences of such a transaction would also need to be considered as, for example, consents may be required). The sale of the new company can then potentially benefit from SSE. In this context, we note that the assets need to continue to be used for the purposes of a trade carried on by the target company at the time of disposal. The legislation does not specify a minimum period during which the target company must carry on the trade in order to rely on para 15A. In an example in HMRC’s Capital Gains Manual (at CG53080C), the period is one month before disposal. While many tax advisers may regard this as a ‘safe harbour’, this is only an example and not a minimum requirement.

To the extent that there was any uncertainty, the recent First-tier Tribunal case of M Group Holdings Ltd v HMRC [2021] UKFTT 69 (TC) makes it clear that to rely on para 15A, there needs to have been a group for the necessary 12 month period. In that case, a standalone trading company (CoA) set up a subsidiary company and acquired another company, which became a subsidiary in short order. It then transferred part of its business and assets to one of its new subsidiaries (CoB), before disposing of CoB less than 12 months after CoB was incorporated. While CoA and CoB had used the assets to carry on a trade for a combined period of more than 12 months, the capital gains group did not exist for at least 12 months, and so SSE was not available.

Where a target company has not been trading for 12 months, to rely on para 15A for SSE, the target company must be a trading company immediately after the disposal. A corporate seller in this case may wish to insist on a buyer providing an undertaking that they will procure that the target company continues to trade for a period post disposal.

In considering the application of para 15A, and SSE generally, the anti-avoidance provisions in para 5 should be considered. Under para 5(a) and (b), SSE will not apply where an untaxed gain accrues to the corporate seller on a disposal of shares in the target company, and:

• the corporate seller acquires control of the target company or the same person(s) acquire control of both companies; or

• there was a significant change of trading activities affecting the target company at a time when the corporate seller controlled it, or the same person(s) controlled both companies, in pursuance of arrangements (which includes any scheme, agreement or understanding, whether or not legally enforceable) where the sole or main benefit that could be expected to arise is to secure SSE.

In practice, provided there are commercial reasons for moving a business and its assets intra-group to a new group company, we would not anticipate that para 5 would apply to deny the benefit of para 15A. In cases where there is material uncertainty, it may be prudent to apply to HMRC for non-statutory clearance on the application of para 5 based on the particular facts. Our experience is that HMRC will provide non-statutory clearance in such matters.

De-grouping charges

Where a sale of the target company would result in it leaving a tax group, there may be an optimum time to sell to avoid de-grouping charges that would otherwise arise. An analysis of the requirements to form and to leave a particular tax group is beyond the scope of this article, but the requirements should be considered in each case, as the group tests are not consistent for each tax.

Where a sale of the target company would result in it leaving a tax group, there may be an optimum time to sell to avoid de-grouping charges

Chargeable gains

A de-grouping charge will arise if the target company ceases to be a member of a capital gains group owning an asset acquired on a no gain/no loss basis from another group member within the previous six years. On first principles, the company leaving the group would be treated as though it had sold and immediately re-acquired the asset at market value immediately after the intra-group disposal. However, where the target company leaves the group as a result of a share disposal, if a gain would arise, the gain would accrue to the corporate seller and would increase the sale proceeds for the disposal of the shares for corporation tax purposes (TCGA 1992 s 179(3D)).

The benefit of this approach is that if SSE applies and the corporate seller would be exempt from corporation tax on any gain on the disposal of the target company, any de-grouping gain would also be exempt.

Intangible fixed assets (IFAs)

The IFAs regime also contains de-grouping rules similar to the chargeable gains regime. A de-grouping charge may arise if the target company leaves the tax group owning an IFA acquired from another group member within the previous six years (CTA 2009 s 780). On first principles, the company leaving the group would be treated as though it had sold and immediately re-acquired the asset at market value immediately after the intra-group disposal.

There is not an equivalent TCGA 1992s 179(3D), but rather, with effect from 7 November 2018, if the target company leaves the group and SSE applies, the de-grouping provision is disapplied (CTA 2009 s 782A).

SDLT, LBTT and LTT

Stamp duty land tax (SDLT), land and buildings transaction tax (LBTT) and land transaction tax (LTT) group relief can be subject to withdrawal (and therefore the SDLT, LBTT or LTT which would have been payable had group relief not applied, becomes payable). This can happen where the target company leaves the same SDLT/LBTT/LTT group as the company which transferred a land interest to the target company within three years of the effective date (or in pursuance of, or in connection with, arrangements made within that three-year period) of the relevant land transaction. A clawback will only arise if the target company still holds the land interest on which group relief was claimed when it leaves the group (FA 2003 Sch 7, LBTT(S)A 2013 Sch 10, LTTADT(W)A 2017 Sch 16). We would recommend that the provisions are reviewed in each case, as there may be an exemption that applies.

If there was likely to be a withdrawal of group relief and therefore a liability arising to the target company, typically a buyer would look to adjust the price so that in effect the corporate seller suffers the cost.

In practice, it is now more likely that there will be a clawback of SDLT/LBTT/LTT group relief than a de-grouping charge under the chargeable gains or IFA regime, since SSE will generally apply to exempt the charge under the chargeable gains and IFA regime.

Group relief

In a situation where a group is profitable but the target company has trading losses, the timing of the disposal could, where relevant, be important to allow the corporate seller and its group to claim maximum losses from the target company, and so reduce its corporation tax liability.

Broadly, carried forward trading losses arising in accounting periods beginning on or after 1 April 2017 of the target group should be eligible to be group relieved against profits of its loss group provided the target company and the group company claiming the losses are in the same loss relief group during the accounting period to which the claim relates (CTA 2010 s 188CB). This is subject to general restrictions on loss relief (a detailed review of these restrictions is outside the scope of this article). If the target company leaves its loss group part way through the accounting period to which the claim relates, only profits and losses apportioned to the period in which the target company was within the same group will be eligible for group relief (CTA 2010 s 188DG and ss 188EB–188EH). This apportionment is calculated on a time basis, unless the results would be unreasonable or unjust, in which case the apportionment must be calculated on a ‘just and reasonable’ basis (CTA 2010 s 188EG).

The target company would cease to be in a group for loss relief if the corporate seller lost beneficial ownership of its current shareholding in the target company. Once a formal unconditional contract, or agreement whereby the sale is bound to happen, has been entered into for the transfer of the target company’s shares, it would cease to be a member of the same group as the corporate seller for loss relief purposes. However, the target company would also be treated as leaving its former loss relief group at the point ‘arrangements’ come into place to transfer its shares (CTA 2010 s 154). ‘Arrangements’ are very widely defined in the legislation as ‘arrangements of any kind (whether in writing or not).’ A number of principles have been established through case law and HMRC’s guidance (in particular, Statement of Practice 3/93):

• HMRC considers that an arrangement may exist even though it is not enforceable and therefore ‘arrangements’ has a far wider interpretation than purely contractual arrangements.
• It is not limited to a single step or purpose and what matters most is the effect of the arrangements.
• It does not matter if the arrangements are never implemented.
• In the context of a company sale, straightforward negotiations for disposal will not generally give rise to ‘arrangements’ before an offer is accepted subject to contract or similar conditional basis. Therefore, signature of a letter of intent or heads of terms is likely to bring arrangements into existence for this purpose.
• If a disposal requires shareholder approval, HMRC’s view is that operations leading towards disposal will not give rise to ‘arrangements’ before that approval is given or at least until the directors become aware such approval will be given.

Care should therefore be taken to ensure that ‘arrangements’ are not made prematurely so that maximum group relief claims can be made.

Impact on manager sellers

Corporate sellers should consider the optimum time to sell from the perspective of all other stakeholders, but perhaps particularly manager sellers. These individuals may be key directors or employees of the target company, and their cooperation in assisting with a smooth sale process could be invaluable.

Business asset disposal relief (BADR)

UK tax resident employees often focus on eligibility for BADR and paying capital gains tax at 10% rather than 20% on qualifying lifetime gains up to £1m. BADR is available where, throughout the period of two years ending with the date of disposal of the shares:

1. the target company is a trading company or the holding company of a trading group;
2. the individual is an employee or officer of the target company (or of another company in its trading group); and
3. the individual holds at least 5% of the ordinary share capital and at least 5% of votes by virtue of this shareholding; and would either be entitled to at least 5% of (i) profits available for distribution to ordinary shareholders and certain loan note holders, and a right to at least 5% of the assets of the target company available for distribution on a winding up, or (ii) proceeds in the event of a disposal of the whole of the ordinary share capital of the target company.

The requirement in (c) will often mean that BADR will not be available (where, in the past, entrepreneurs’ relief may have been).

However, and crucially, the 5% ordinary share requirement in (c) does not need to be satisfied for option holders who hold enterprise management incentive (EMI) options to be eligible to claim BADR on the sale of the shares acquired on exercise of their EMI options (EMI shares). Provided the EMI shares are sold at least two years after the date of grant of the EMI options, the option holder will be able to claim BADR if the requirements in (a) and (b) are satisfied in the two-year period ending with the disposal of the EMI shares (TCGA 1992 s 169I(7A)).

Final thought

In this article, we have touched on what we consider the main tax considerations for a corporate seller in determining the optimum time to sell a target company. It is important that all tax implications are considered, for both the corporate seller and other stakeholders, as delaying a sale for a matter of months could in some cases reap significant tax benefits.

First published in Tax Journal, 18 November 2022. Republished here with permission.