XYZ Limited is a successful company and operates in two distinct although related areas. One is the retail of cars and the other is a car garage MOT & servicing business. The directors have decided that the two businesses need to be run separately going forward and it is proposed to appoint new operating directors for each company. They are therefore now considering how the trades can be separated. It is estimated that the car retail business is worth £2m and the MOT & servicing business is worth £1m.

If the car retail business was simply sold to a new company owned by the existing shareholders, the Corporation Tax from selling the trade would be £380,000, along with SDLT on the sale of the property from which it trades. There is also the practical problem of then having to deal with the £2m due from the new company to the trading company.

We would recommend a demerger in these circumstances. It should be possible to demerge the car retail trade from the company without incurring the SDLT and corporation tax, an immediate saving of at least £380,000. This would also remove the problem of how to deal with the amount payable for the business, 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 each company can then focus on their particular business an appoint the new operating directors as desired.

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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