What is the relief?
This is a tax relief designed to benefit the serial entrepreneur who is looking to reinvest the profit from the sale of one venture into further business opportunities.
It avoids tax becoming due on the sale of shares held in a trading company.
The relief applies when a trading company operating independently or as part of trading group sells part of a substantial shareholding in another trading company.
What are the conditions?
‘Substantial’ means that the company selling the shares must own 10% or more of the ordinary shares (and at least 10% of the assets on a winding up) in the other company.
The shares must have been owned for a period of at least 12 months in the two years before the sale.
There are provisions to aggregate the shares held by companies and their 51% subsidiaries.
How does the relief work in practice?
An example of the relief working in practice is as follows.
XYZ Holdings Limited is a holding company with three trading subsidiaries. All of the subsidiaries are wholly owned by the holding company. The subsidiaries have been in place for a number of years.
X Limited makes ice cream and all its shares are owned by XYZ Holdings Limited.
Y Limited makes wafers and all its shares are owned by XYZ Holdings Limited.
Z Limited makes chocolate flakes and all its shares are owned by XYZ Holdings Limited.
The owners of XYZ Holdings Limited have received an offer for the chocolate flake business Z Limited of £1 million.
The shares of Z Limited are sold to the new owners and XYZ Holdings receives £1 million in cash.
XYZ Holdings Limited, by making use of the exemption, has no tax to pay on this sale. It can use the proceeds any way it wishes. They could, for example, be used to buy a new company, to expand the existing businesses or to make a dividend payment to shareholders.
If a dividend is paid, then the income is taxed in the normal way as income.
Do let me know if you have any comments on the above.