There are so many reasons why a company may undergo a demerger but as a result of the UK’s stronger economy and ‘better-than-expected’ growth figures, we’re seeing an increasing number of organisations choosing to divide up their companies to become two (or more!) businesses.
Whether it’s a property company that wants to divide up its assets between shareholders or a family business that disagrees how the company is run and wish to go their separate ways by taking part of it with them or even an owner managed company that decides to split up and sell one of its divisions as a separate organisation; one of the main aims in any demerger is to mitigate the tax implications so that the process is as financially efficient as possible, whilst ensuring that each company ends up with the desired business / assets.
One example demerger that we have supported at Champion Accountants was a well-established heavy plant and haulage business that held a large investment portfolio of properties within the organisation. The presence of the investment portfolio inside the trading business could have potentially spoiling a number of valuable tax reliefs that the company would have otherwise been eligible for, such as Entrepreneurs’ Relief and Business Property Relief. Champion helped the Company undertake a demerger and separated the two elements of the company into separate companies at the same time being able to minimise the tax consequences throughout the transaction including Corporation tax, Capital Gains Tax and Stamp Duty Land Tax.
There is no one-size-fits-all approach to demergers as every company that we deal with is different as well as the circumstances and reasons that surround the decision, be that personal or commercial.
Demergers are incredibly complex and specialist advice is essential, including lawyers to represent both sides and an expert tax planner. The expertise of your tax team is needed to identify what legislation would impact or benefit the transaction, such as Reorganisation and Insolvency legislation, and the advice that they provide is heavily relied upon by the professional advisors involved.
In addition to the tax traps, a separating business is usually still reliant on the group’s core functions such as IT, banking, suppliers and also its customers, which must also be carefully managed during the split. Good planning and business advice is essential from the start and whilst demergers are not for the faint hearted, they can bring major long-term benefits for all those involved.