Demergers - Can I break up a group of companies?

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.

Statutory demerger

• 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.

By liquidation

• 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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