The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:
In certain circumstances a demerger by way of a Companies Act reconstruction may be suitable, ie if the company does not have sufficient distributable reserves for an exempt demerger.
Under CA 2006, Part 26 (subscription sensitive), a company can, with court approval, make a compromise or arrangement with its shareholders or creditors. In the context of a demerger this would involve a reduction in the company’s share capital. In return shareholder rights to a return of capital are reduced by the transfer of a business or shareholding to a new company.
The tax consequences are similar to those applicable to a demerger via a liquidation because the definition of 'Scheme of Reconstruction' in TCGA 1992, Sch 5AA includes a reconstruction under CA 2006, part 26 (subscription sensitive). The availability of CGT reconstruction reliefs in TCGA 1992, s 136 and 139 should give a tax-efficient result, however, there are potential tax liabilities under this route, particularly Stamp Duty and / or Stamp Duty Land Tax. The main difference in the tax analysis relates to the position of the shareholders which is discussed below.
For guidance on demergers via a liquidation see the Demerger via a liquidation guidance note.
It should be possible for the original company to obtain relief from tax on the distribution of the business by virtue of the provisions for relief from tax on corporate gains on reconstructions in TCGA 1992, s 139.
Relief under TCGA 1992, s 139 is available in respect of a 'Scheme of reconstruction' which is defined in TCGA 1992, Sch 5AA. Usually a Companies Act reconstruction should satisfy the conditions but this should be confirmed for each scenario. The main conditions for section 139 relief to apply to a Scheme of Reconstruction are that:
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