One matter that often arises in the life of a family company is a need to re-organise and separate out its operations. This might be needed to allow different family members to take parts of the business in different directions, or to isolate valuable assets from trading risks, or for reasons of tax efficiency. The question is whether a demerger of the business can be achieved without creating unacceptable tax consequences.
Adrian Widdowson, Associate Tax Director
The potential tax costs arise because demergers involve the company disposing of valuable assets, including goodwill, in circumstances where the shareholders are in effect taking those assets out of the company. Without special tax relief rules, we would have to treat these disposals as if they were sales at full market value, creating potentially large tax bills for the company and its shareholders.
Fortunately the tax rules make allowance for this, and permit demergers to take place without these tax liabilities becoming due. However, the rules are quite detailed and restrictive in how they apply, and professional expertise is vital to ensure that the family company doesn’t fall into one of the many pitfalls that exist. We have to consider corporation tax, income tax, CGT, VAT, IHT and stamp duties, and the rules that apply have subtle variances for each of those taxes.
There are different ways of carrying out a demerger, but I want to concentrate on a couple of examples showing what we can achieve.
In one case, parents and son had separate companies carrying on very similar retail businesses. Both businesses used premises that were owned by the parents’ company. It made commercial sense to bring the retail operations into a single company, but to keep ownership of the property separate.
Working closely with the bank and legal advisers, we were able to move the property to a separate company owned by the parents, and to merge the trading businesses in a single company owned by all three. The property company has leases to the trading company for the use of the properties, providing a steady income stream for the parents as they move towards retirement. Despite the property being worth a couple of million pounds, and a similar value being placed on the retail businesses, we were able to do this with the only tax being stamp duty of a few thousand pounds. The resulting structure also eased the family’s succession plans for the future.
Another case involved a large group of companies with interests in different retail businesses. As part of a plan for succession and to pass shares to the key personnel who are going to drive these businesses forward in the future, we helped the family split up the group into three separate groups. Again, the values were substantial, but we achieved this with only a small stamp duty cost.
The prospect of re-shaping a company structure can seem daunting, but we have done these transactions many times and we know what the issues are. If you feel that your company structure is getting in the way of what you want to achieve for business development, succession or any other reason, please come and talk to us.
