Muras Matters: Demergers



A demerger is the process of separating different activities from within the same company or to separate a company from a group structure.

A standalone company can contain a number of different activities, for example a trading company may also own a number of residential lets. Alternatively, several activities could be carried out within separate companies in a group structure.

For a number of reasons it may be desirable for shareholders to split these activities either into different ownership or different entities. Without some form of tax relief the process of splitting a business could be very penal. There are however a number of reliefs available which may enable a demerger to be carried out with little or no tax to pay.

The process however is a complex one and clearance will be required from HM Revenue & Customs, in addition to the legal documentation of the transaction. We have considerable experience in dealing with the demerger process and help shareholders achieve their objectives in a tax efficient manner.

Possible reasons for a demerger

A demerger can be attractive for a number of reasons, for example:

  1. Business Property Relief – this is a relief from Inheritance Tax. Broadly, the relief does not apply if a business consists of wholly or mainly dealing in securities, stock or shares, land or buildings or making or holding investments. A demerger may be desirable in order to ensure a company with both trading and investment activities is separated into an element which does qualify for relief and one which doesn’t.
  2. Entrepreneurs’ Relief – in a similar way to Business Property Relief, Entrepreneurs’ Relief for Capital Gains Tax can be lost if a trading company contains investment activities to any substantial extent. Again it may be desirable to separate trading and investment businesses to ensure ER is not jeopardised.
  3. Separate objectives – if the management or shareholders have different objectives for a company, then it may be desirable for the different activities to be split out to enable the shareholders to go their separate ways.
  4. Long term structure – a shareholder may prefer to separate out the activities of the company to give future flexibility over which parts of the business they may ultimately retain which they may dispose of.
  5. Estate planning – as a business grows and diversifies over time, a shareholder may intend for different people to inherit different parts. A demerger would enable this objective to be met.

This is a very broad summary of a complex issue, if you have questions about demergers or the tax reliefs mentioned above then please contact our Tax Director, Jenny Marks.

To see our other news items please visit our Muras Baker Jones – Blog.