Case Study - complex demerger and restructuring

Our client is a large landowner looking at retiring and giving an inheritance to this son who would not be taking over the family farming business. It was decided that certain parts of the family business with a value of around £20,000,000 that weren’t related to farming would be demerged from the overall business structure. In the main part the business to be demerged included such assets as residential properties, glamping facilities, and land for residential property development (including some old farm buildings). The process for the demerger was very tax driven and required HMRC clearance prior to starting the project.

Challenges

The challenges to be addressed included:

1. Working with the tax adviser on the legal structure that would achieve the desired outcome - this included using various legal methods such as a three-cornered demerger, a s110 liquidation scheme, a capital reduction, share for share exchange, the use of different classes of shares, the issue of new shares, and a dividend in specie.

2. Drafting documentation that reflected the complex tax structure that also adhered to the HMRC tax clearance.

3. Using 15 different steps to successfully demerge and restructure the business so that there was a tax neutral effect on the business.

4. Drafting a large number of complex documents - including a demerger agreement, share for share exchange agreements, share purchase agreements, shareholder resolutions, and board minutes.

Solutions

1. Restructure planning - the first stage was to understand the existing corporate structure and assets through due diligence and identify possible solutions to spin-off those parts of the business that would be transferred to the owner’s son. The assets were mainly property and land held in a number of different group companies such that we had to move companies and specific assets around the group structure whist maintaining tax neutrality.

We were fortunate that there were few employees associated or contracts with the assets and relevant companies being demerged. Although there is no specific statutory procedure for effecting a demerger there are various tools that are available using general principles set out in the Companies Act 2006 and the Insolvency Act 1986. After careful consideration of the tax implications of each tool we were able to structure a step-by-step process.

2. Setting up a structure and procedure - the key solution was to document a step-by-step procedure to demerge certain parts of the business using the various tools. This document would form the key parts of the application to HMRC. In order to achieve the desired goal of spinning off a large part of the family assets, we had to use a number of different tools and techniques in order to ensure that there was a neutral tax impact. The key tools we used were :-

• a three-cornered demerger

• a s110 liquidation scheme

• a capital reduction

• share for share exchange

• the use of different classes of shares

• the issue of new shares and a dividend in specie.

At each stage the tax consequences were analysed by the accountant to ensure that there was a tax neutral effect.

3. Drafting complex documentation

The documentation to implement the demerger and restructuring was extensive and precise. Firstly, the documentation needed to comply with the specific terms of the clearance letter from HMRC, and secondly, it needed to stand up to possible scrutiny by HMRC for its tax effect. There was a total number of approximately 35 separate documents that had to be signed in a specific sequence in order to achieve the desired effect. We minimised the use of warranties and indemnities because it was a family related demerger. Once the documentation has been signed and dated, and post-completion matter dealt with, we had managed to separate £20,000,000 worth of assets from the family group.

Impact

Given the high value business that was being demerged it was extremely important that the steps were followed in order to avoid any negative tax implications. Carefully planning and execution allowed us to successfully implement a complex demerger and restructuring to achieve the client’s goals.

Disclaimer: this case study is not legal advice. If you require legal advice on the subject matter then please don’t hesitate to contact us. We don’t provide tax advice, if you require tax advice then please discuss with your tax adviser.