Stephen Hemmings –
Tax Partner
Peter Mills –
Director
Why would a business or group need to be split up?
There are a number of reasons why a business may benefit from being split up into component parts or where shareholders may want to separate their business interests by demerger:
1. Business Partners Separating Business Interests
- Disagreements or disputes can arise between shareholders;
- Different owners may have different strategic visions;
- Separating the business allows different groups of shareholders to each pursue their own strategy independently.
2. Split of assets in anticipation of sale
Splitting the group can facilitate the disposal of separate business units whilst ensuring proceeds can accrue directly to the shareholders (and Entrepreneurs’ Relief may be available) allowing proceeds to be brought into personal hands in a more tax efficient manner.
3. Incentivise employees with interest in specific entities
Certain tax efficient venture capital and employee share schemes can only be granted over specific types of companies and in the parent company of the group.
Certain activities may contaminate the qualifying status of the group for the purpose of those reliefs.
4. Separate businesses from external investment
Separate business units or specific activities can allow funds to be raised or employees incentivised in a more tax efficient way than could be achieved in all activities were in the same group.
5. Increase capital value
The value of the individual parts of the group may be more than the value of the whole. Separating those businesses can unlock a group’s full value and can also help improve the profile of some operations which may help with negotiating contracts or fundraising.
Separating businesses into distinct group structures can help ring fence higher risk operations away from lower risk ones (and other valuable assets).
6. Separating businesses for risk management
Separating businesses can also help management gain better focus over the performance of each unit to make more efficient strategic decisions.
7. Tax protection and risk management
Separation of a group into its trading and non-trading components can protect valuable tax reliefs – Business Property Relief (IHT exemption) and Entrepreneurs’ Relief – which are only available for trading groups and may be prejudiced by non-trading assets or activities in the same group.
What is a demerger?
A demerger involves the separation of a single company or group into several smaller and distinct companies or groups and is a common process used to partition an existing business into components or between different shareholders.
How do demergers work?
There are three common approaches to achieve a demerger, which will be appropriate in different circumstances. Each can have its own advantages, disadvantages and tax risks so careful planning is critical to make sure the transaction works as effectively as possible and any risks are managed.
Statutory demerger by exempt distribution
Often most straightforward to implement but tax reliefs have prescriptive conditions and complex anti-avoidance rules prevent certain share transactions within 5 years of the transaction.
Companies Act capital reduction demerger
Popular approach as reasonably straightforward and can be used for both trading, non-trading and mixed groups but requires several technical steps and careful planning.
S110 liquidation demerger
More established route that can be used for both trading, non-trading and mixed groups and companies but often more costly and complex to implement as requires the appointment of a liquidator. Company liquidations can carry a stigma.
How can we help?
Demergers can often be achieved without significant tax exposure but the tax environment applicable to these types of transactions is complex and there are a range of tax reliefs and risks to navigate. There are often several stages to implementation and therefore careful planning is paramount. This is particularly the case where property is involved and Stamp Duty Land Tax and VAT are material considerations. Menzies has specialist experience advising on corporate reconstructions including demergers and works proactively with clients to find effective restructuring solutions that achieve their commercial objectives in a tax efficient manner and support them through the process of planning and implementation including with HMRC Clearances.
Contact us about Business Demergers and Reconstructions
For more information about the business reconstruction or demerger services we offer, please contact Menzies.
