Breaking the group – is demerging your solution?

31st May, 2018

We are seeing increasing amounts of corporate restructuring and demergers, where the assets of a group are split to be held separately by the original shareholders. With careful planning, this can usually be achieved with little or no tax cost.

Demergers are used to achieve a range of business and tax objectives such as:

  • Shareholders want to go their separate ways and take distinct parts of the business in different directions under separate ownership;
  • The group has evolved with conflicting business streams creating customer confusion, so the shareholders move them into separate groups;
  • A family inherit a group, the new owners wish to split the assets into family groups so each family can protect its own wealth and pursue its own business strategy;
  • A shareholder wishes to separate property investment activities from the trading group. This could be because of ER/BPR planning or because of future plans to sell the trading group but retain the property investments. There are three main types of demerger; a Statutory or Exempt Demerger, a Liquidation Demerger or a Capital Reduction Demerger.
  • The shareholders can remain the same in both demerged groups (Fig 1), or the shareholder group can be split (Fig 2)

Demerger diagrams

There are three main types of demerger; a Statutory or Exempt Demerger, a Liquidation Demerger or a Capital Reduction Demerger.

  1. The Statutory or Exempt Demerger has a number of strict conditions making it unsuitable for many business scenarios we encounter.
  2. In the past, liquidation demergers were widely used where a Statutory Demerger was not possible. However, these are now less common.
  3. The third form of demerger, the Capital Reduction Demerger, is now increasingly popular following changes to the Companies Act in 2008 that allow a private company to reduce share capital with the support of a director’s statement of solvency, which is a fairly simple procedure. Previously a company would have required the consent of a court to reduce their share capital.

During a demerger part of the group (“the demerged assets”) are split out under a new company (or companies) owned by all or some of the original shareholders. After the demerger the demerged assets are held by a separate new holding company, owned by some or all of the original shareholders. The other assets remain within the original group, which is owned by some or all of the original shareholders.

Advance clearance should be sought from HMRC disclosing all aspects of the transaction in detail to ensure that a tax free demerger is achieved. The demerger has to be carefully planned to avoid unintended tax costs and experienced lawyers should prepare the legal documents. Capital reduction demergers have a number of advantages over other forms of demerger including:

  • No requirement for the companies involved to be trading companies;
  • No legislative restriction on selling either part of the demerged group;
  • No requirement for any company to be liquidated;
  • The retained assets do not change ownership so reducing Stamp Duty or Stamp Duty Land Tax costs.

Capital Reduction Demergers can be a very useful and tax efficient method to split a corporate group. The tax department at PKF Francis Clark provide specialist advice to shareholders, management and companies on acquisitions, disposals and corporate restructurings. Please do not hesitate to contact us.

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