Demerger to protect Business Asset Disposal Relief and Business Property Relief

If you own a trading company and over time you have invested surplus profits in investment assets you may lose the favourable tax status of the company.

What does favourable tax status mean? Shares in a trading company can attract Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) on a sale. This is a 10% rate of capital gains tax on the first £1m of gains during your lifetime. Shares in a trading company can also attract Business Property Relief for Inheritance Tax, this means the value of the company should not attract 40% Inheritance Tax.

When a company gets a mix of good tax assets (trading) and bad tax assets (investments) then there are tipping points at which Business Asset Disposal Relief and Business Property Relief are lost. It is therefore vital to keep a close eye on the build-up of investments.

If the scales are about to become out of balance then a demerger is likely to be the answer to cleaning up the trading company and removing the bad tax assets into a separate company.

It is possible to do this with the benefit of HMRC clearance before implementing the transactions. So provided it is implemented in the right way you know HMRC will not apply anti-avoidance rules.

Why consider a demerger? The tax costs of simply separating the assets could be considerable. Using a demerger should minimise the tax costs by using statutory tax relieving provisions to minimise any tax costs in the company and personally.

We have included a case study.

We have designed and implemented many demerger transactions and specialise in this area helping clients with an effective and efficient alternative to the larger accountancy firms. Don’t let tax stop you from separating your business, there could be a tax efficient path through. Contact Craig Simpson or Richard Coombs to discuss your case.

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.