An interesting trend coming out of lockdown, with more enquiries from business owners regarding their options to break up a group of companies. Some because shareholders wish to go their separate ways with their respective subsidiary companies, others wishing to simply divide the group without a change of ownership for commercial reasons.
There are a number of options to achieve separation, but invariably there are tax charges and numerous practical obligations which are not particularly palatable. This article focuses on a transaction commonly known as a demerger (which can mitigate the tax charges in particular) and the methods of demerging companies from groups.
For completeness, if you have a number of divisions within one company, it is also possible to demerge activities.
- The legislation provides for the distribution (value of company/ies), to the shareholders are exempt from tax charges.
- The distributing company must be a trading company or holding company of a trading group.
- Sufficient distributable reserves must cover the distribution.
- A minimum 75% ownership must be held in the trading subsidiaries subject to the demerger.
- Following the exempt distribution, a five year window remains open where certain payments can be subject to income tax and degrouping charges can come back into charge. This is invariably a key reason why statutory demergers are not pursued.
Share capital reduction
- This method provides greater flexibility over the group’s activities e.g. you can demerge an investment subsidiary.
- The directors are required to sign a solvency statement, which given the current economic circumstances may not be as straight forward as expected.
- There is no five year rule like the statutory demerger.
- Reserves are generally not an issue.
- This will require the involvement of an Insolvency Practitioner, so invariably the professional costs are increased, yet generally provides no further benefit to a share capital reduction demerger.
Demergers can be complex transactions; HMRC clearances are available to provide comfort to the shareholders and directors. These are not inexpensive options for separation; with professional valuations, tax advice regarding the chosen option mechanics, legal fees; but it may just be the fresh start you were looking for, without incurring onerous tax charges.
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