When your company is looking to split into two or more separate businesses, you may consider a demerger.
This allows each company to operate independently with its own assets, liabilities, management and strategy.
A demerger can be beneficial for the growth of your company, but you must understand the planning required and tax implications before you proceed.
Our Corporate Finance expert, Matthew Johnson, explains how to successfully plan for a demerger.
What types of demergers are there?
Companies often consider a demerger during periods of change or disagreement or when different parts of the business no longer work well together.
Demergers can be carried out in a tax-efficient way if structured accurately.
If it is not prepared correctly, shareholders may automatically face a tax charge simply because the business has been split.
In the UK, there are three main ways in which a tax-efficient merger can be achieved.
These include:
- Statutory demerger – This is often the simplest and most tax-efficient merger where legal and tax conditions are met. However, many companies do not qualify and clearance from HMRC is recommended.
- Capital reduction demerger – Where a company reduces its share capital and transfers assets or shares to a new or existing company owned by the same shareholders. This is commonly used ahead of a sale or where shareholders want to separate group companies.
- Demerging by liquidation – This involves a solvent liquidation and distribution of assets and may not be favoured due to reputational concerns and the loss of goodwill.
What are the benefits of a demerger?
Businesses often demerge to streamline operations and reduce overheads, particularly where different parts of the business have different strategies.
Demergers are also commonly used to facilitate a sale where a buyer only wants part of a group or company.
They can also help solve shareholder disputes, protect valuable assets, attract new investment or satisfy lender requirements where funding is only available to one part of the business.
When done properly, a demerger can increase the value of a business and allow for more focused growth.
What are the risks of a demerger?
Moving assets and changing ownership during a demerger can result in additional Corporation Tax, Capital Gains Tax or Stamp Duty Tax liabilities.
Other risks include:
- The need for shareholder approvals
- Third-party consents from banks or landlords
- Solvency issues, especially in capital reduction demergers, where directors must confirm the company can still pay its debts
Poor planning can put your demerger at risk of being challenged by creditors or shareholders and early legal support can help you take the necessary steps to remain compliant.
How can you plan a successful demerger?
Successful demergers require early planning and must factor in timing for HMRC clearances.
With the right legal support, we can help review share capital and ensure all your legal documents are completed in the correct order.
We can advise you on the most suitable type of demerger for your company so that your business is in the best position for success.
For more tailored advice on your business demerger, contact our Corporate Finance team today.
