There's rumored increases to Capital Gains Tax in April 2021, so you should be considering the ownership structure of investment assets.
Demergers... Is it time to split?
16 December 2020
Businesses often grow and expand over a period of time to later find that not all shareholders or directors are aligned anymore in terms of the overall direction or growth strategy of the company. Most will be owner-managed or family businesses that have grown such that different people are responsible for separate departments or types of business. As the business has grown, each may wish to take that department forward and possibly separate from the other parts.
At times, this brings about the decision to part ways or split the business up. There are of course various reasons as to why directors and shareholders of limited companies might choose to split up from one another into two or more companies, some of which could be;
- A dispute or disagreement between shareholders.
- Succession planning to bring in the next generation.
- To achieve tax efficiency (for example to improve the Business Relief ‘BR’ position of the group).
- In anticipation of a future sale of a part of the business.
- To protect valuable assets from the trade of another company.
Whatever the reasons, the goal will be to undertake the procedure of splitting up as tax efficiently as possible for both the company and the shareholders. A split up by way of a demerger may appear simple on the face of it, but in reality, carries a number of potential tax implications. It may not always be possible to implement a reconstruction or demerger without a tax charge, however in general, income tax and capital gains tax often don’t need to be the ones payable. It’s more likely that stamp duty or Stamp Duty Land Tax will be charged, however, with careful planning, this can be managed.
There are a number of ‘mechanisms’ through which a demerger can be undertaken ranging from a capital reduction or liquidation demerger to a statutory demerger.
Case study – Statutory Demerger
Take a look at the following example- two shareholders own 100% of ‘A Ltd’, and A Ltd holds 100% ownership of B Ltd. A Ltd and B Ltd each operate a distinct trading business in their own right.
The current group structure’s as follows;
Shareholder A is fully involved in the running of A Ltd, whilst Shareholder B is fully involved in the running of B Ltd. A Ltd and B Ltd are classed as a wholly trading group with no investment assets or non-trading income.
The shareholders would like to split from one another, so that Shareholder A leaves the group structure owning A Ltd and Shareholder B leaves the group owning B Ltd.
This can be achieved through a statutory demerger mechanism by way of A Ltd distributing the B Ltd shares to a ‘NewCo’ owned by Shareholder B. The end structure would result in Shareholder A being 100% shareholder in A Ltd and Shareholder B owning 100% of the shares in a NewCo which in turn owns 100% of the shares in B Ltd.
The final group structure’s as follows;
Demergers don’t necessarily require shareholders to go their separate ways – a similar result could be achieved with both Shareholder A and Shareholder B continuing to own both companies, but with the companies separated from each other.
Transactions such as demergers and reconstructions are highly complex by nature and specialist tax advice is vital. Advance clearances can be sought where HMRC’s asked to confirm that certain tax provisions have been complied with.
If you think a split’s something that could benefit your business and you’d like to explore what can be achieved, please don’t hesitate to get in touch with our Tax team on 01604 746760.