Demerger when outgrowing your family-owned investment company

When a single company holding all your family’s investments no longer suits your family’s circumstances, a demerger may be the answer.

A family investment company (FIC) sounds like a grand piece of planning, but in reality can be thought of as not much more than a cleverly constructed company owned by various family members, usually to pass on family wealth more tax efficiently. When they are set up, the (wealthy) parents typically give assets or cash to their children who then use the money to invest in the company. The benefit is that the parents are typically the company’s directors and therefore retain a large degree of day-to-day control over what happens to the family’s investments, whilst not physically owning them.

This often works well for many years, but children have a habit of growing up and wanting to go in their own directions. Sometimes, the family realise that a single company holding all of the family’s investments is no longer fit for purpose and therefore they decide that the company should be split up into separate investment companies for each child (or perhaps grandchildren by that point).

In these circumstances, a demerger is often the preferred solution. It should be possible to demerge the various parts of the FIC, including any property it might own, with minimal or no tax cost.

We have included a case study.

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 family member (or group of family members) could own a separate company holding its own investment assets. These could still remain under the day-to-day control of Mum and Dad as directors, if still appropriate, or pass to the next generation.

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.