It is possible to achieve a demerger with no tax costs at all.
Craig Simpson, Tax Partner at Bates Weston looks at the complications involved when seperating business and investment assets from a company.
"We regularly advise on the separation of businesses and investment assets from a company. Without sound advice the result can be crippling tax costs. We are talking here about a demerger and done in the right way, it can be achieved with no tax costs at all. Designing a tax efficient demerger can be an art in itself. Not only are there direct taxes to consider but also VAT, Stamp Duty and SDLT. A frightening prospect if you are not a specialist.
At the very outset, the question of a liquidation vs a capital reduction route should be considered, and possibly the statutory option (but we will park this route for now). The liquidation route is tried and tested and corporate lawyers are generally well versed on this. But it is generally more expensive and complicated in terms of process and the number of advisors required. The shareholders are also required to indemnify the liquidator.
On the other hand, more often than not a capital reduction demerger can fit the bill. This does not require a liquidation and not surprisingly uses the Companies Act 2006 capital reduction process to achieve the demerger. We have designed and implemented many capital reduction demergers now but do still observe a lack of experience in the market place for legal services. It is vital to have a good corporate lawyer to implement such transactions.
A liquidation demerger can still be appropriate for a property investment demerger where two or more shareholders are going their separate ways. There are certain SDLT reliefs that are only relevant in the event of a liquidation.
As part of the process HMRC clearance should be obtained. It is a common misconception that HMRC clearance means HMRC are rubber stamping the demerger and that as a result the tax reliefs will apply. That is wrong, in granting clearance HMRC are only saying they are happy that the transactions are being undertaken for commercial reasons and they won’t apply anti-avoidance provisions to deny the reliefs. In fact, clearance letters from HMRC specifically state they don’t confirm the tax reliefs apply. So it is important the implementation is undertaken with accuracy and therefore a corporate lawyer with experience of these transactions is vital.
The key message is that demergers need an experienced advisor to design and implement the process to ensure the tax reliefs apply and choose an experience corporate lawyer to ensure a slick and efficient process."
As ever with tax, this article is generic in nature and you should take no action based upon it without consulting your professional advisor.