Substantial Shareholding Exemption – read the small print!

Substantial Shareholding Exemption – read the small print!

A recent case has highlighted the importance of satisfying the strict terms of legislation, this time in the context of corporate structuring.

In M Group Holdings Ltd v HMRC [2023], the eponymous taxpayer (hereafter MGL) had traded as a singleton company until around June 2015 (providing services to clinics through medical contracts granted by the NHS). In order to sell the business, a new wholly-owned subsidiary called Medinet Clinical Services Limited (MCS) was incorporated on 29 June 2015. MGL transferred its trade and assets to MCS on 30 September 2015. The shares in MCS were then sold to a third party on 27 May 2016, just under 11 months after MCS had been incorporated.

In its corporation tax return, MGL treated the gain on the disposal of shares in MCS as exempt under the substantial shareholding exemption (SSE), and so considered it was not liable to pay corporation tax on the gain in value of the shares (around £10.5m). HMRC disagreed with this and the matter went to the First Tier Tax Tribunal (FTT).

FTT decision:

At the FTT, the issue was whether the SSE applied to exempt MGL’s gain on the sale of the shares in MCS. The appeal was dismissed.

The SSE requires that the investing company holds a substantial shareholding in the investee company for a continuous twelve-month period prior to disposing of shares in it. The FTT found that MGL did not satisfy this condition, having only held the substantial shareholding for eleven months between June 2015 and May 2016.

MGL argued that SSE relief should be granted as it fell within a ‘look through’ provision contained in certain legislation in the Taxation of Chargeable Gains Act 1992. Broadly, this provision permits the 12-month ownership period to include the period in which the trade and assets which were transferred to the investee company were used by another group member (so in this case, the period for which MGL itself carried on the trade should be added to the 11 months for which it owned the shares in MCS).

The FTT rejected this argument and sided with HMRC on the basis that the look-through provision required there to be a group in place at the relevant time. This could not have been the case when MGL transferred the trade and assets to MCS as before that transfer, MGL was a stand-alone company. Therefore the 11-month actual holding period could not be treated as extended.

Upper Tribunal (UT) Decision:

On MGL’s appeal to the UT, it contended (‘valiantly’) that a group can consist of a single company. It argued further that the look-through provision should be construed purposively to include a single company as otherwise this would have the unintended consequence of disallowing the look-through for transfers of a trade and assets by a stand-alone company to a new subsidiary but not for example, disallowing it in the case of a company which had a dormant subsidiary to which it had transferred a trade and assets.

The UT flatly rejected this novel argument, holding that there was no error in the SSE legislation. The term ‘group’ should be given its ordinary meaning and therefore should not and would not be extended to also include a single company. On this finding, the purpose of the SSE look-through provision is to extend its application to groups only.


This case highlights the importance of strict adherence to the requirements of legislation, in this case in the context of corporate structuring. Simply by waiting one more month to sell the shares in MCS, the issue in this case would not have arisen. Further, the key issue in such cases curiously appears to be whether the company to which a singleton company’s trade and assets are transferred is a new company or not. If MCS had been a dormant subsidiary then it would have been part of MGL’s group and the SSE 12-month period could have been met using the look-through provision. Single companies in these instances may therefore consider simply incorporating a dormant subsidiary in case they ever need it to carry on a trade, though the potential anti-avoidance rules which might seek to challenge a structure designed purely to achieve such an SSE advantage need to be carefully considered.