Company demergers can be complex, but in most cases it should be possible to demerge trades and businesses tax efficiently.
Craig Simpson considers the alternatives.
In any demerger there needs to be a clear view on the commercial, legal and practical aspects of a demerger as well as ensuring this is achieved without adverse tax consequences. So what are the options for a tax efficient demerger? There are typically three routes to consider
- Liquidation demerger
- Capital reduction demerger
- Statutory demerger
Possibly the most well known demerger route but fading in popularity, the liquidation demerger relies on the use of reconstruction reliefs to avoid tax charges at shareholder and corporate level. Such demergers can be an expensive process due to the requirement to involve a liquidator, two sets of lawyers, and tax advisors.
A liquidation demerger involves the liquidation of a company in order to distribute assets to the shareholders as part of a scheme of reconstruction. As a result the activities of a company or group can be subdivided into a number of new companies as appropriate.
They are commonly used:
- To separate trades where the larger part of the group is being sold. This may enable the vendors to benefit from 10% CGT under Entrepreneurs Relief.
- Partitioning trades and businesses into separate ownership for shareholders who are parting company.
- Splitting investment activities from trading activities.
Capital reduction demerger
Growing in popularity is the capital reduction demerger. The Companies Act 2006 allows an unlisted company to reduce its capital without the need for court approval. Such a demerger relies on the same tax reliefs as a liquidation demerger but can be achieved without the need to liquidate. As a result it is far easier to implement and should be less costly.
Again this can be used for splitting trades and/or investment businesses.
Statutory demergers do what they say on the tin, they provide tax relief for the demerger transactions on a statutory footing where the qualifying conditions are met. Both liquidation and capital reduction demergers rely on generic restructuring reliefs. A statutory demerger is only suitable for the splitting of trades, but not where one of the demerged trading entities is to be sold. It cannot be used for splitting investment businesses such as property letting.
Planning the demerger is an essential step for a tax efficient transaction. We have many years of experience at designing and implementing demergers. Please call us on 01332 365855 to discuss potential clients who may be looking at a demerger or contact firstname.lastname@example.org.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.