Substantial shareholdings exemption

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The substantial shareholdings exemption is an exemption from assessment of capital gains under corporation tax applicable to United Kingdom companies. The exemption is found in Schedule 7AC of the Taxation of Chargeable Gains Act 1992.

Tax exemption is a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios.

United Kingdom corporation tax corporate tax levied in the United Kingdom on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK

In the United Kingdom, corporation tax is a corporate tax levied in the United Kingdom on the profits made by UK-resident companies and on the profits of entities registered overseas with permanent establishments in the UK.

Taxation of Chargeable Gains Act 1992

The Taxation of Chargeable Gains Act 1992 is an Act of Parliament which governs the levying of capital gains tax in the United Kingdom. This is a tax on the increase in the value of an asset between the date of purchase and the date of sale of that asset. The tax operates under two different regimes for a natural person and a body corporate.

Contents

The rationale for the exemption is that groups of companies should be able to restructure without having to concern themselves with taxation of capital gains.

Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.

Other European jurisdictions apply a more comprehensive system. For example, in Luxembourg and the Netherlands as well as in Germany and Belgium, both capital gains derived from, as well as dividend income earned on, qualifying shares are (mostly) exempt from further local taxation. These comprehensive systems are generally referred to as participation exemption systems.

Participation exemption is a general term relating to an exemption from taxation for a shareholder in a company on dividends received, and potential capital gains arising on the sale of shares.

Eligibility

To qualify for the exemption, a disposal must meet all of the following criteria:

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly called stocks. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Common stock form of corporate equity ownership, a type of security

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently in other parts of the world; "common stock" being primarily used in the United States. They are known as Equity shares or Ordinary shares in the UK and other Commonwealth realms. This type of share gives the stockholder the right to share in the profits of the company, and to vote on matters of corporate policy and the composition of the members of the board of directors.

Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner’s major interest in income formation process of market production. There are several profit measures in common use.

The last two conditions must be met:

Applicability

The exemption only applies to disposals of shares made on or after 1 April 2002. [12] The relief is automatic, meaning that a company does not have to submit a claim to Her Majesty's Revenue and Customs.

See also

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A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company.

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals, and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Taxation in the United Kingdom income tax

Taxation in the United Kingdom may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.

Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset, or financial transaction. Double liability is mitigated in a number of ways, for example:

Finance Act

A Finance Act is the headline fiscal (budgetary) legislation enacted by the UK Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year, and in particular setting out the principal tax rates for each fiscal year.

Accounting period (UK taxation)

An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains. An accounting period begins whenever a company comes within the corporation tax charge, and whenever an accounting period ends without the company ceasing to be within the charge. There are a number of rules about when an accounting period ends, and we look at each of these below.

The schedular system of taxation is the system of how the charge to United Kingdom corporation tax is applied. It also applied to United Kingdom income tax before legislation was rewritten by the Tax Law Rewrite Project. Similar systems apply in other jurisdictions that are or were closely related to the United Kingdom, such as Ireland and Jersey.

Taxation in the Republic of Ireland Irish tax code

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A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies, and income and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to investment trusts in the UK or business development companies in the United States.

Income and Corporation Taxes Act 1988

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Finance Act 2000

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Budget Note 66 (BN66) is the mechanism by which the UK Government introduced clause 55 of the Finance Bill 2008, which would later become Section 58 of the UK Finance Act 2008. This specifically targeted tax avoidance schemes that made use of offshore trusts and double taxation treaties to reduce the tax paid by the scheme's users. These schemes were heavily marketed to the freelance community after the introduction of intermediaries legislation known as IR35, as they appeared to offer more certainty concerning tax liabilities than would be the case if running a limited company.

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The Abgeltungsteuer is a flat tax on private income from capital. It is used in Germany, Austria, and Luxembourg.

References

  1. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 1(1)
  2. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 7
  3. ↑ Finance Bill 2017-19, clause 27(3)
  4. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 8(1)(a)
  5. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 8(1)(b)
  6. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 8(1)(c)
  7. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 18
  8. ↑ Finance Bill 2017-19, clause 27(2)
  9. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 19
  10. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 18(1)(a) and para 19(1)(a)
  11. ↑ Taxation of Chargeable Gains Act 1992, Schedule 7AC, para 18(1)(b) and para 19(1)(b)
  12. ↑ Finance Act 2002, section 44(3)
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