By Simon Denye, Partner, Dow Schofield Watts Tax Consulting LLP
Groups may want to split out their activities for many different reasons. There may be conflicting interests between shareholders, legal reasons to separate a trade out from the rest of the group with corporate protection, or it may be the only way for a purchaser to be able to buy certain parts of the business.
The term ‘demerger’ covers several possible structures:
- demerger by reconstruction / Insolvency Act 1986, s 110 demerger (subscription sensitive)
- statutory demerger
- demerger by way of reduction of share capital
There are tax provisions which should enable certain tax advantages, mainly that for tax purposes a qualifying distribution is exempt and as such there is no income tax for the shareholder.
Where specified conditions are met, ‘paper for paper’ treatment is extended to situations where shareholders receive shares in a new company which takes over the former company’s trade.
Reduction in share capital
Companies Act 2006 (subscription sensitive) contains provisions in relation to the reduction of share capital by private companies. The procedure has been simplified mainly by the removal of the necessity to apply to the courts and so has become more popular.
Generally, there should be no distribution for tax purposes provided the amount received by shareholders does not exceed the nominal value of the shares plus any share premium. As no shares are transferred, there is no stamp duty.
Purchase of own shares
Companies can repurchase or ‘buy back’ their own shares. Where there is no other market for shares this may be the only way that shareholders can get the capital they originally invested in the company back. Depending on the circumstances, the share disposal by the individual can be treated as either income or capital for tax purposes.
Transfer of a trade
There are provisions which apply to the transfer of a trade (‘succession to trade’) between companies under common ownership.
Where one company owns at least 75% of another, or both companies are under the 75% common ownership, plant and machinery will automatically be transferred to the successor company at tax written down value and trading losses are transferred to the successor company along with the trade.
Simon is a Partner in Dow Schofield Watts Tax Consulting LLP. He has over 21 years’ experience providing advice to a wide range of clients including large corporates, SMEs and high net worth individuals.