Corporate Hot Topics: Corporate Demergers

Demergers can be a useful means of dividing up a business or group, but the search for a tax-efficient mechanism can lead to tax pitfalls if the wrong structure is chosen, or the process is not properly implemented.

In simple terms, a demerger is a transaction whereby some of the assets of one company are transferred to another entity, usually owned by some or all of the shareholders of the transferring company.  The assets being transferred can be shares in other companies or trading assets.

Why carry out a demerger? 

Common reasons for carrying out a demerger include:

• Risk management – certain assets (such as a property owned by the company) can be shielded from risk if they are demerged from the trading company. Similarly, shares in subsidiary companies may be demerged out of a group to protect those companies from the risk of insolvency events elsewhere in the group.
• Strategy – different parts of a business, or different businesses carried out by the same company or group, may benefit from different growth strategies. A demerger may allow different approaches to be pursued more easily.
• Sale of part of a business – an offer to acquire part of a business or group may require a pre-transaction demerger, or a decision may be taken to market one particular division of a business for sale, whilst retaining the balance of it.
• Facilitating an exit of a shareholder – an exiting shareholder may wish to retain an interest in part of the business or a property. Conversely, removing the company’s property may make the company a more affordable acquisition target, particularly in the case of a purchase by a management team.

Capital reduction demergers 

A capital reduction demerger is a process which allows a demerger of assets from a company, often as part of a wider reorganisation, to take place in a manner which is tax efficient (and can sometimes be entirely tax neutral) for the shareholders.

This is achieved by using particular corporate structures to ensure that the transfer of assets which are to be demerged is treated as a capital, rather than an income, distribution.  This capital distribution may then qualify for certain tax reliefs.  Transfers of property without crystallising VAT and/or SDLT liabilities may also be possible.

The corporate team at Lupton Fawcett has extensive experience of all types of corporate reorganisations.  Over the last few years we have advised a range of clients on all forms of capital reduction demergers.  We can assist with the initial consideration of the tax implications, including the submission of a tax clearance to HMRC, the implementation of the legal documents giving effect to the demerger and the submission of applications for any available tax reliefs.  We will be very pleased to discuss the options with you so please feel free to get in touch.