Demerger when outgrowing your family-owned investment company – a demerger case study

The X family have generated a lot of wealth over the years and some years ago set up a Family Investment Company (FIC) to hold many of the family’s investments. Whilst the company is managed by Mr & Mrs X, their three adult children are the shareholders.

Whilst the structure has proved effective, the children have now taken more of an interest in the investment strategy adopted by the company and have differing views over how their share of the family pot should be invested.  Mr & Mrs X have therefore agreed to give each of the children more control over their share and have decided that the FIC should be split into three separate companies.  Whilst they will continue to act as directors in each company, each child will also become a director in their own company.  The family are therefore considering how best to split the company’s assets.

If the assets were to be sold to new companies owned by each of the children, the Corporation Tax from selling the assets would be significant due to the gains made on the investments made by the company. There is also the practical problem of then having to deal with the consideration due from the new company to the existing FIC for any assets transferred.

We would recommend a demerger in these circumstances. It should be possible to demerge the investments from the FIC without triggering any capital gains.  This would also remove the problem of how to deal with the amount payable for the assets, as the demerger would be structured to avoid this.

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 child would be a 100% shareholder in their own company and would also have a set on the board of that company.  This would then allow them to pursue their own investment strategy, independently of their siblings.

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 your 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.