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Tax Bite – Hive-downs

Where a corporate seller is selling a business, instead of selling the business and assets directly to the buyer, a more attractive alternative can be to hive down the business into a (new or existing) subsidiary company, and sell the subsidiary company to a buyer.

Hive-downs can be more attractive from a corporate seller’s tax perspective than a direct transfer of a business / assets to the buyer, and a buyer should be persuaded that there is no more risk than acquiring a business and assets as they acquire a clean company (and there may be additional tax benefits too, see below). However, hive downs require careful analysis and an understanding of the implications.

Some of the key (potential) tax features and considerations on a hive-down include: -

• Ability to preserve trading losses – a buyer can’t acquire trading losses on a business and asset purchase. On a hive-down, provided the transfer of the business to the subsidiary amounts to a transfer of a trade with common ownership before and after the transfer, trading losses of the transferred business can transfer down to the subsidiary. There is a lot of detail in these rules however, and anti-loss buying measures that could potentially have effect, so where the preservation of losses is desired, detailed advice is needed.

If there is a transfer of a trade within the group, capital allowances assets also transfer on a tax-neutral basis.

For both of these points, and generally on a hive-down, it is crucial that the seller does not lose beneficial ownership of the subsidiary until after the business has transferred down and has been operated for a short period of time. This of course requires careful drafting of the transaction documents.

• Possibility of no tax on gains for the corporate seller – often it is possible - subject to an important exception noted below - for a corporate seller to transfer a business into a new subsidiary and then sell that subsidiary with the benefit of the substantial shareholdings exemption (SSE), which provides for a complete exemption from corporation tax on gains for the seller if it applies.

It is very important to note that this will only work if (amongst other conditions):

o there has been a corporate group (two or more companies) in place for at least 12 months prior to the hive-down; and

o the subsidiary acquires at least one or more assets that have been used in the transferred trade (by a member of the group) for at least 12 months prior to the hive-down.

If a singleton company were to incorporate a first subsidiary, hive a trade down and immediately sell the subsidiary, SSE would not be available. A recent Upper Tribunal has (following the First Tier Tribunal) confirmed this to be the case.

It might therefore be thought that a single company should always have a dormant subsidiary sat underneath it just in case ever needed for this precise reason, however due to specific and general anti-avoidance rules, it cannot be guaranteed that this would work.

• Effect on capital gains and intangible asset degrouping charges – if the sale of the subsidiary qualifies for SSE, then (a) any degrouping charge on capital gains assets is wiped out by SSE and the relevant assets have their tax base cost stepped up to market value in the subsidiary, and (b) any intangible asset degrouping charge is switched off – but without any stepping up in the cost of the asset. If SSE fails however, degrouping charges would apply on the sale of the subsidiary.

• SDLT on property interests - whilst SSE is of great assistance in eliminating other degrouping charges, there will be no relief from SDLT on transfers of property interests between the seller and subsidiary on a hive-down, so no benefit in that respect compared to a direct property sale.

• VAT on the hive-down – as with any other business and asset sale, VAT needs careful consideration on a hive-down. Often the transfer will be capable of being a TOGC and so not subject to VAT, but attention must be paid to the practical requirements in particular e.g. does the subsidiary need to be registered for VAT before the hive-down, and does it need to opt to tax properties?

• Consideration for the hive-down and sale – typically the (market value) consideration for the hived-down business and assets will be left outstanding on inter-company loan account owing from the subsidiary to the seller. On the sale of the shares in the subsidiary to the buyer, the share sale consideration may then be as little as £1, with the buyer separately procuring that the subsidiary repays its debt to the seller. That way there would be no stamp duty on the share purchase, but it can introduce other potential complications e.g. grossing up for tax if there are claims under the warranties / indemnities in the SPA.

As always, please feel free to contact us if you have clients who are involved in, or may be contemplating, a business sale or hive-down. Even if other (non-lawyer) tax advisers are engaged, in our experience it can be beneficial to have tax legal input on a hive-down due to the importance of ensuring that the transaction documents properly reflect all the requirements of the relevant tax rules.