Breaking the group – capital reduction demergers

Breaking the group – capital reduction demergers

Corporate demergers, whereby corporate groups are split and held separately by the original owners, are a popular and tax efficient solution to many commercial issues such as:

  • The owners want to 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 owners want to move them into separate groups;
  • After the founder’s death, a group is owned by the extended family who wish to split the assets between two family groups so each family can protect its own wealth and pursue its own business strategy;
  • The owners want to separate non-trade assets such as property from the trading company before a future the disposal of the trading company;
  • The owners want to separate a viable trading activity away from historic liabilities that could cause issues on a future sale.

The shareholders can remain the same in both demerged groups (Fig 1), or the shareholder group can be split (Fig 2).

An incorrectly structured demerger can be an extremely expensive tax event. However, it is possible with careful planning to demerge a group with nil or manageable tax costs.

In some cases, a Statutory or Exempt Demerger can be used but this route has several strict conditions making it unsuitable for many business scenarios we encounter, so we generally use a Capital Reduction Demerger process which is more flexible in the following ways:

  • No requirement for the entities to be trading companies;
  • No legislative restriction on selling either part of the demerged group in future;
  • 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.

Tax reconstruction reliefs are vital to remove what would otherwise be significant tax costs.  Advance clearance should be sought from HMRC disclosing all aspects of the transaction in detail.  Detailed analysis of all the tax impacts is required to ensure unexpected tax charges do not arise.

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