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:
- 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.
- 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.
- 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.
- 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.
- 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.
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