Demerger to separate assets from a company before sale – A demerger case study

XYZ Limited is a successful trading company and has received an offer from a third party to buy the shares for £10m. The purchaser has said that it 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.

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.