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Tax Bite – Refresher on Demergers

Demergers are popular as a way of separating trades / businesses (including investment businesses) in a tax efficient manner. They can be used in preparation for a sale, prior to an investment, or just as a commercial strategy to ring-fence one business or asset base from another. Broadly, provided they are correctly structured they can allow for this with no or minimal tax leakage.

Over time spare cash in a business or group may be used to fund new ventures, non-core strategies or investment activities. At the outset and without knowing where these new activities may lead, as well as with core activities constantly demanding attention, we find that the overall strategy of the structure that is put in place, and its potential wider impact from a tax perspective, may not be properly understood by business owners.

This is where we can help, as we can provide clear advice on how a “one-size fits all” structure may not be fit for purpose in every scenario.

For instance, it is possible that operating an investment activity alongside a trade in a single company or group structure might mean that the shareholders are not able to qualify for business asset disposal relief - the 10% rate of capital gains tax on the first £1m of qualifying gains – when they come to sell their business.

There may also be other good reasons for undertaking a demerger, such as in preparation for a sale, where some assets (usually investments or properties) are intended to be retained by the shareholders or are unlikely to be wanted by a buyer.

It is also possible that a demerger of a property that is standing at a capital gain, by way of transfer of that property to a new property investment company within the group, followed by a demerger of that company, could give rise to a “step up” of the base cost of that property to its current market value in the property investment company.

With it being likely that a general election will occur later in the year and any new government potentially needing to raise (or at least alter) taxes in order to fund spending commitments, now may be a good time to consider the structure of your or your clients’ businesses to check they work as intended and aren’t storing up any tax headaches for the future.

Due to the combination of tax reliefs that are normally required to implement a demerger on a tax-neutral basis, it is usually highly advisable to seek pre-transaction clearance from HMRC on certain aspects. This needs to be built into any timetable as HMRC have 30 days to respond.