Capital Reduction Demergers – the fashionable way to split

21 July 2022

• Tax

Capital reduction demergers can be a very useful and tax-efficient method for business owners to split a corporate group.

A capital reduction demerger is a specific way of splitting an existing business, or group of businesses, into two or more component parts. The mechanism used to achieve the demerger is a reduction of part of the share capital of the original group, hence the name. The owners of the newly separated business(es) can be the same as, or different to, the original shareholders.

Some recent reasons for demergers we have advised on are:

• The shareholders want to take distinct parts of the business in different directions under separate ownership;
• A group comprises a number of distinct business streams, which will require separate management and incentive structures, so distinct ownership structures are needed;
• The shareholders want to sell one part of a group, but retain the other
• A shareholder wishes to extract a property from their company before the disposal of the trading business

What are the advantages over other demerger options?

This form of demerger has a number of advantages over other forms of demerger including:

• No trading company restrictions – there is no requirement for the group (or components thereof) to be trading, this is effective for investment groups in the same way
• No legislative restriction on selling either part of the demerged group – other forms of demerger cannot be undertaken in contemplation of a sale
• No requirement for any entity to be liquidated – reducing cost and due process
• Reduced Stamp Duty or Stamp Duty Land Tax costs – as retained assets are not changing ownership

Find out more

Magma’s tax team can provide specialist advice on this and all forms of business restructuring, to ensure commercial transitions are also tax-effective. If you would like to find out more, get in touch with one of our team below.