Separating trades for commercial focus and sales appeal, whilst minimising tax charges through a demerger.

During a business’ lifecycle a company may expand into different markets as the directors seize on opportunities presented to them. Sometimes the expansion is into something complementary – an asbestos survey company expanding into asbestos removal and disposal for example – or into a totally different market to hedge risk or balance a seasonal trade. The result can be a single company with multiple trades. From a tax perspective this is not usually problematic, as any losses from one trade will automatically offset against profits of the other, and administratively there are only one set of accounts to prepare, one payroll etc. However, commercially it may not be optimal. Different trades often require different skill sets and a single board of directors may not be suited to both trades. Also, a company with diverse trades is unlikely to be as attractive to a potential purchaser who would typically be looking to “bolt on” a particular trade to their own.

Where a company needs to split the trades up into separate companies, this can be done relatively simply using a group structure with a holding company and different subsidiaries. This does not completely solve the problem though, as if any of the subsidiaries were ever sold, the cash ends up being stuck at the holding company level and could only be extracted at capital gains tax rates if the whole group was liquidated. What is generally preferred is to separate each trade into a separately owned company. The problem is how to do this without triggering a large tax charge? A sale of the trade from one company to another would trigger a capital gain based on the market value of the trade being sold (including any goodwill) and therefore could generate a large “dry” tax charge – “dry” in the sense that no external cash has been received for the sale.

In these circumstances, a demerger is often the preferred solution. It should be possible to demerge the trade, including any property it might own, without incurring SDLT, corporation tax or personal taxation. There are actually several ways to demerge trades – there is a statutory demerger which is simpler in terms of legal steps and therefore cost, but more onerous in terms of what you are allowed to do post-demerger. Alternatively, a non-statutory demerger is often preferred due to the flexibility it offers.

We have included a case study.

Whichever version of the demerger is to be used, 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 shareholders would now own separate companies each containing separate trades. What’s more, depending on how the demerger was effected, the Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) “clock” would not be re-set, meaning that a sale of any of the companies shortly after the demerger could still qualify for the 10% rate.

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.


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