Private company demergers - what, why and how

What is a Demerger?

A demerger is a corporate restructuring technique where a parent company splits into 2 or more separate companies. This can be done in various ways, each with different legal and tax implications.

The process is complex, with legal, tax and commercial considerations. Planning is vital. Our experienced team can guide you through the entire demerger process, from initial planning to post-demerger compliance.

Why would you split your businesses?

• Business restructuring - consolidating operations and simplifying the corporate structure.

• Capital release - unlocking value by separating non-core assets and returning capital to shareholders.

• Strategic focus - allows your businesses to focus on core competencies and improve operational efficiency.

• Unlocking value - can unlock the value of individual business units that may be undervalued as part of a larger group.

• Facilitating investment - attract investment for specific separated parts of your business.

• To allow sale of part of the business.

• Shareholder protection - enhancing shareholder value by capital reduction and mitigating risks by isolating liabilities or focusing on core competencies.

• Simplifying structure - reduces complexity and administrative costs.

• Tax efficiency - can offer tax advantages, such as capital gains tax relief or stamp duty land tax savings.

The 2 types of company demerger

There are 2 main types of demerger for private limited companies, which are :-

• Statutory demerger – this is a process governed by the Companies Act 2006, which Involves transferring assets and liabilities to a newly formed company and requires shareholder approval and court sanction. Suitable for separating trading activities into two or more independent companies, with potential CGT advantages and more often used with large-scale, complex demergers.

• Capital reduction demerger - a less formal process involving the distribution of shares in a subsidiary company to shareholders. Often used for simpler demergers where the parent company retains a significant interest in the demerged company.

Steps involved in the demerger process

• Strategic planning - consider the most suitable structure and assess the legal, tax, and financial implications. and develop a detailed implementation plan. Determine the fair market value of the assets and liabilities.

• HMRC clearance application - seek clearance from HMRC to ensure that the demerger will not trigger unwanted tax consequences, prepare a comprehensive application, addressing all relevant tax issues and respond to any HMRC queries or requests for additional information.

• Board and shareholder approval - the board of directors of the parent company must approve the demerger and obtain shareholder approval for the demerger, typically through a special resolution

• Establish new corporate entity - set up a new holding company and any necessary subsidiaries.

• Share for share exchange agreement - key considerations will include how shares in the new company will be allocated among the shareholders of the parent company, the methodology for valuing the assets and liabilities to be transferred to the new company, tax implications, any financial adjustments

• Asset Transfer - transfer assets and liabilities to the new entity, obtain necessary third-party consents, such as from landlords, lenders, and suppliers. Update relevant records, including property registers, bank accounts, and insurance policies.

• Stamp Duty Land Tax (SDLT) - assess SDLT implications, particularly for share transfers and property transfers. File the necessary SDLT returns and pay any applicable taxes.

• Employee transfers - transfer employees to the demerged companies, complying with employment law.

Is HMRC clearance needed or advisable?

HMRC clearance is not strictly compulsory for a demerger. However, it is highly advisable to seek clearance from HMRC regarding the possible liability for Stamp Duty land Tax (SDLT) before proceeding with the demerger.

Obtaining HMRC clearance provides certainty to minimise tax liabilities, optimise the demerger structure and reduce the risk of future disputes with HMRC, which can be costly and time-consuming.

If you proceed with a demerger without seeking HMRC clearance, HMRC may challenge the tax treatment of the demerger, leading to unexpected tax bills, penalties and Interest.

How we can help

We work closely with clients to develop tailored demerger strategies that align with their business objectives. We draft and review all necessary legal documents, including agreements, transfer documents and board resolutions, employment law and regulatory issues and post-demerger obligations.