Richard Coombs, tax partner at Bates Weston considers demergers as a way to resolve shareholder disputes. A demerger is a form of corporate restructuring which splits a business into two or more smaller organisations.
Where the relationship between a group of shareholders has broken down, it can be counterproductive to continue to operate as one company. The shareholders might be considering ways to separate the ownership of the assets but the tax cost of just moving assets from one company to another could be considerable and undermine the wealth generated by the company to date.
In these circumstances restructuring through a demerger can help to separate the assets into a number of companies tax effectively, allowing separated shareholders to take their respective parts of the business or investment activities under their sole ownership.
A demerger should minimise the tax costs by using statutory tax relieving provisions and if this is done with the benefit of HMRC clearance before implementing the transactions, HMRC will not apply anti-avoidance rules.
Bates Weston’s tax team have separated many companies in recent years and reduced the tax costs in many cases to very low levels, often zero or just ½% stamp duty cost.
Richard looks at a case study. All figures relate to the tax rates in force at the time of writing:
ABC Limited is a property investment company owning commercial property with a combined value of £10m. Two families own the shares in the company. They have fallen out and decided that they want to split the properties between the two families. They would like to do this in a tax efficient way.
The properties are all standing at significant gains, so taking a simplistic approach of selling the properties to a new company owned by one of the families would result in significant corporation tax cost and Stamp Duty Land Tax (SDLT) cost. There is also the matter of how the family would deal with the intercompany debt created by selling the properties.
Distributing the properties directly to the shareholders would also lead to significant corporation tax and income tax costs and these costs could undermine the continuing ownership of the properties and the proposed separation.
We would recommend a partition demerger in these circumstances. It should be possible to partition the property ownership into two separate companies without incurring any personal or corporate taxes. This would also remove the problem of how to deal with the amount payable for the property, as the demerger would be structured to avoid this. The VAT position of the transfer of the property would also require careful handling.
On a property partition there can be SDLT costs and it depends on the circumstances as to whether the demerger can be structured to reduce this cost to ½% stamp duty on the value of the property being demerged, or in some cases no tax cost at all.
A clearance application would be made to HMRC setting out the proposed steps of the demerger and the commercial rationale. HMRC granting clearance would provide assurance that HMRC would not impose anti-avoidance legislation on the transactions. It is important to understand that the clearance does not confirm reconstruction tax reliefs apply. A good corporate lawyer and review of the documents from a tax perspective are therefore vital.
The result of the demerger would be two companies owning the investment property, each company owned 100% by each family, the separation complete so that the families can focus on the future.
The Bates Weston tax team are specialists in demergers and reconstructions and have a significant amount of experience at dealing with demergers for privately owned companies worth between £5m – £100m.
If your shareholder relationships are coming under strain, don’t let tax stop you from separating your business, there could be a tax efficient path through. Contact Craig Simpson or Richard Coombs to discuss you circumstances and see how we can help you.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.