Demerger to protect Business Asset Disposal relief and Business Property Relief – a demerger case study

XYZ Limited is a successful trading company. The company has accumulated a significant amount of investment property and listed stocks and shares. They are held in a holding company with the main trade being operated through a trading subsidiary.

There are concerns that the trading status of the group for the purposes of Business Asset Disposal Relief (10% CGT rate on first £1m of gains) has already been lost and that Business Property Relief (100% relief from Inheritance Tax) is under threat. The shareholders would like to preserve the Business Property Relief and access Business Asset Disposal Relief again in due course (2 year waiting period).

A simple group structure with a holding company and trading subsidiary is common for a growing business and allows for the separation of non-core assets away from the riskier trading activities.

The properties and investments are all standing at significant gains and so taking a simplistic approach of selling the properties to a new company outside of the group owned would result in significant corporation tax cost and SDLT cost. There is also the matter of how the shareholders would deal with the intercompany debt created by selling the assets to a new company. Distributing the properties and investments directly to the shareholders would also lead to significant corporation tax and income tax costs.

We would recommend a demerger in these circumstances. It should be possible to demerge the property and investments without incurring SDLT, corporation tax or personal taxation. 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 now clean trading group should continue to benefit from Business Property Relief and will restart the clock for Business Asset Disposal Relief qualification period of two years.

We 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. Contact Craig Simpson or Richard Coombs to discuss you circumstances to 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.