It is often the case that as a company evolves it can end up with multiple separate trades or could have established a significant property portfolio alongside its trading activities. This diversification in assets and trading activities can be vital for the growth of the business but can create its own problems, some of which could be:
• How do you protect the valuable property assets from the commercial risks in the underlying trading activities?;
• How do you incentivise key staff in one trading activity only?;
• If you want to divest one of the trading activities how can you facilitate this in a tax efficient manner? or
• What if the current shareholders have differing views on how the business should be taken forward, how do they split the business to allow this?
The answer to all of these is to look at splitting the company up into multiple companies with the same or differing ownership groups as the current company.
Without specific reliefs such a division would incur significant tax costs for both the company and the individual shareholders. To avoid such charges there are specific reconstruction reliefs available with three main types of demerger that can be considered;
• A dividend demerger. This is considered the simplest option and can be used where the split required is of two trading activities with the same ownership being left in each part. The businesses being split by way of, say, one trade being paid out to the shareholders by way of dividend in specie.
• A liquidation demerger. As the name suggests this involves the liquidation of the current company, or more often of a newly created holding company. During the liquidation process differing parts of the business can be transferred to the existing shareholders or different parts to different shareholder groups.
• A capital reduction demerger. In recent years this has become the preferred method of a demerger allowing the benefits of a liquidation demerger, but often at a fraction of the cost. It is reliant on there being sufficient share capital in the company to effect the demerger. However, if this is not currently the case a step up in share capital can be achieved as a precursor to the capital reduction.
The choice of the best route to follow will depend upon the specific circumstances in each case and what the aim of the demerger is both in the short and long-term. In all cases clearance can be obtained from HM Revenue & Customs that they will not use any of their anti-avoidance powers to deny available tax reliefs.
At Thomas Westcott we have extensive experience on advising companies and shareholders on the best route to follow to achieve their commercial aims. As well as obtaining necessary clearances from HMRC and working with your legal advisors to implement the demerger. Please contact us if you would like to discuss how we can help you.