Richard Coombs, tax partner Bates Weston, considers a demerger as a way splitting up your family’s investment holding company when your family’s circumstances change.  A demerger is a form of corporate restructuring which splits a business into two or more smaller organisations.
A company owned by various family members, usually to pass on family wealth more tax efficiently, is known as a Family Investment Company or FIC. When they are set up, the (wealthy) parents typically give assets or cash to their children who then use the money to invest in the company. The parents are usually the company’s directors, retaining a large degree of day-to-day control over the family’s investments, whilst not physically owning them.
As the children mature and begin to make their own way in the world, their goals may differ from those of their parents. On occasion a family, realising that a single company holding all of the family’s investments is no longer fit for purpose, may decide to split the company into separate investment companies for each child – or perhaps grandchildren by that point.
In these circumstances, a demerger is often the preferred solution. It should be possible to demerge the various parts of the FIC, including any property it might own, with minimal or no tax cost. If done with the benefit of HMRC clearance before implementing the transactions, HMRC should not apply anti-avoidance rules.
Following the demerger, each family member (or group of family members) could own a separate company holding its own investment assets. These could still remain under the parents’ day-to-day control as directors, if still appropriate, or pass to the next generation.
To illustrate this type of restructure, Richard considers a case study.
Family X have generated a lot of wealth over the years and some years ago set up a Family Investment Company (FIC) to hold many of the family’s investments. Whilst the company is managed by Mr & Mrs X, their three adult children are the shareholders.
Whilst the structure has proved effective, the children have now taken more of an interest in the investment strategy adopted by the company and have differing views over how their share of the family pot should be invested.
Mr & Mrs X have therefore agreed to give each of the children more control over their share and have decided that the FIC should be split into three separate companies.  Whilst they will continue to act as directors in each company, each child will also become a director in their own company.  The family are therefore considering how best to split the company’s assets.
If the assets were to be sold to new companies owned by each of the children, the Corporation Tax from selling the assets would be significant due to the gains made on the investments made by the company. There is also the practical problem of then having to deal with the consideration due from the new company to the existing FIC for any assets transferred.
In these circumstances, we would recommend restructuring the FIC through a demerger.
It should be possible to demerge the investments from the FIC without triggering any capital gains. Â This would also remove the problem of how to deal with the amount payable for the assets, as the demerger would be structured to avoid this.
A clearance application would be made to HMRC setting out the proposed steps of the demerger and the commercial rationale. HMRC granting clearance would provide assurance that HMRC would not impose anti-avoidance legislation on the transactions. It is important to understand that the clearance does not confirm reconstruction tax reliefs apply. A good corporate lawyer and review of the documents from a tax perspective are therefore vital.
Following the demerger each child would be a 100% shareholder in their own company and would also have a seat on the board of that company, allowing them to pursue their own investment strategy, independently of their siblings.
If your family is outgrowing your Family Investment Company, talk to us about tax effective ways to move forward. We are specialists in demergers and reconstructions and have a significant amount of experience at dealing with demergers for privately owned companies worth between £5m – £100m. Contact Craig Simpson or Richard Coombs to discuss your circumstances to see how we can help you.
This guidance is generic in nature and does not constitute advice. You should take no action based upon it without consulting ourselves or your own professional advisor.
