Richard Coombs, tax partner at Bates Weston considers demerger as a form of restructuring your business before sale.

If you are planning to sell your business or are in the process of marketing it, a demerger may be a tax efficient method of accommodating a potential buyer. Demerger is a form of corporate restructuring in which a business is split into two or more smaller organisations.

If a potential buyer does not want to include certain assets in the sale transaction, a demerger can be used to take those assets out of the company before sale, in a tax effective manner. Those assets might include property, investment assets or a smaller trade and the tax cost of extracting those assets can be considerable.

A demerger would transfer the assets not required by the buyer, outside of the existing company ownership into a new company. When HMRC clearance is sought before implementing the transaction, tax costs are considerably reduced.

Richard looks at a case study. All figures relate to the tax rates in force at the time of writing:

XYZ Limited, a successful trading company has received an offer from a third party to buy the shares for £10m. The purchaser does not want to purchase the trading premises and it has been agreed to take the premises out of the company and lease it back to the trading company before the sale of the shares.

The property was purchased many years ago and is worth £1.5m. It is standing at a gain of £750,000.

If the property were to be sold to a new company owned by the existing shareholders, the Corporation Tax from selling the property would be £142,500 and Stamp Duty Land Tax would be £27,000, a total tax cost of £169,500. There is also the practical problem of then having to deal with the £1.5m due from the new company to the trading company.

We would recommend a demerger in these circumstances. It should be possible to demerge the property from the trade without incurring the SDLT and corporation tax, an immediate saving of £169,500. 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.

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.

Following the demerger the sale could go ahead with the proceeds being received by the shareholders.

This is one example of demerger and it could also be used to extract investment assets, such as a portfolio of stocks and shares, investment property, and small trade not required by the buyer.

The Bates Weston tax team, led by Craig Simpson and Richard Coombs, specialise in structuring tax effective demerger and reconstruction transactions for privately owned companies and groups with values between £5 million and £100 million.  If you are planning to sell your business or are in the process of marketing it, please do get in touch to discuss your circumstances and see how we can help.

Published March 2021

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.