If you think you may sell part of your business at some point – get a dormant company in place now

A recent case, M Group Holdings Limited v HMRC, has highlighted an issue with being able to claim Substantial Shareholding Exemption (SSE) on the disposal of part of a business.  This often occurs where a purchaser wants a part of your company, but not all of it, and the approach is usually to ‘hive down’ the target trade and assets into a subsidiary company before selling the shares of the subsidiary.  The generally held view is this is what SSE is for – to enable corporates to divest of non-core activities without a tax charge (if certain conditions are met) to free up funds to invest in other areas.

SSE always had an inherent problem in that you needed to have all your separate trade and asset activities in separate subsidiary companies so that you could benefit from SSE when a disposal came to be made. The rules were relaxed in 2011 to allow the trade and assets to be transferred to a newly formed subsidiary – the classic “hive down” – and as long as that trade had been carried on for 12 months, SSE would be available. Or so a lot of people thought!

In M Group Holdings Limited v HMRC the shares in the subsidiary had only been held for 11 months (despite the trade having been carried on for more than the 12 months required) and the First Tier Tribunal decision ruled that as the subsidiary had only been held for 11 months SSE was not available – in this case costing more than £10m in corporation tax.

So, if there’s a chance that someone may want to buy a part of your business at some point in the future it would be advisable to form a dormant subsidiary company now so that you don’t fall foul of not having held the shares for 12 months.  The trade doesn’t need to have been in the subsidiary for 12 months, and so can be transferred just before a disposal, but crucially the shares in the subsidiary need to have been held for the required 12 MONTH period.