Business owners might want to restructure their business for a variety of commercial reasons, such as planning for a sale, succession planning or restructuring a group to maximise tax efficiency.
There are various routes which a company can take to reorganise its business, such as introducing a new holding company, splitting interests by way of a demerger, or disposing of shares to members of the management team or to the company itself.
All of these methods will have different tax consequences and it is important to seek tax help early on in the process, as there may be a number of different ways to achieve your commercial objectives.
Setting up a group structure or introducing a holding company, (often by way of share for share exchange), can be used for pre-sale planning, for asset protection purposes, or as a result of expanding your business or commercial activities. There must be clear commercial reasons for a reorganisation to ensure that the reorganisation can be undertaken tax neutrally, and HMRC clearance is often needed. We have significant experience in this area.
A share reorganisation can include a wide range of transactions such as alteration of share rights, a purchase of existing shares (whether by third party, existing management or the company itself) or a capital reduction.
Alterations of share rights may be undertaken for various commercial reasons, for example, the issue of different share classes may be necessary to vary the existing voting rights of the shareholders.
All of the above will have substantial tax consequences, and professional tax help should be sought.
There are many reasons why a corporate demerger may be attractive. Splitting the businesses could be seen as a way to unlock shareholder value. A demerger could also be undertaken to ring-fence liabilities attached to a particular business, or as a first step before selling a business.
There are various methods of implementing a demerger, including statutory as well as non-statutory routes. Demergers can be very complex, especially where property or other tangible assets are involved, and it is crucial that appropriate tax advice is sought.
Whilst family investment companies are often, (although not always) used for IHT or estate planning, they often, (although not always!), involve setting up a new group or some form of reorganisation, hence including them here. FICs can be structured in a variety of ways to suit the requirements and circumstances of the family.
The company was a property investment business owned by three shareholders. One of the shareholders was not involved in the business and wished to exit. The original plan before our involvement was for the company to repurchase the shareholder’s shares by way of a company purchase of own shares.
The default position is that a repurchase of shares for more than was invested is treated as a dividend for tax purposes and taxed at dividend rates. There are specific conditions which, if met, mean that the repurchase can be treated as a capital gain and taxed as lower rates. However these rules apply to trading companies only – so if the repurchase has proceeded as planned the shareholder’s tax liability would have been almost double what they were expecting.
Instead of undertaking a purchase of own shares the continuing shareholders set up a new company which purchased the shares of the existing company. The continuing shareholders received shares in the new company in exchange for their shares while the exiting shareholder was paid in cash for their shares. Clearance was obtained from HMRC that they were content that the transaction was being undertaken for good commercial reasons.
The exiting shareholder received their proceeds which are taxed as a capital gain rather than as a dividend, ensuring that their tax liability was in line with their original expectations and they did not get an unpleasant surprise!
Phoenixing is where an existing company is liquidated in order to distribute proceeds as capital gains but another company is then set up to continue the same activities.
HMRC were of the opinion that the Phoenixing provisions applied as another company was formed immediately after the original company was liquidated. This would mean that the majority of the proceeds were taxed at a tax rate of 39.35% rather than capital gains tax rates of 10%/20%. The difference in tax was over ÂŁ1m.
We explained the full facts to HMRC which was that it was not the shareholders’ decision to liquidate the company. The liquidation was in fact instigated by the bank, who wanted assets to be realised to pay off loans, and by HMRC itself, which had threatened the company with a High Court Winding Up Order.
For the Phoenixing provisions to apply, the main motive of liquidating the company must be for the avoidance of tax. Here it could clearly be demonstrated that the liquidation was for bona fide commercial reasons and HMRC accepted that this was the case and closed the enquiry.
50/50 shareholders fell out and one of the shareholders returned to Spain. The UK shareholder wanted the company to purchase the Spanish shareholder’s shares..
As the Spanish shareholder was obviously not UK resident capital treatment of the CPOS was not available. The amount paid would be treated as a dividend and taxable in Spain as income.
We suggested that instead the UK shareholder purchased the shares with the amount paid debited to his director’s loan account. To avoid a benefit in kind arising interest was paid on the outstanding loan and this was cleared within 9 months of the company’s year end which prevented Section 455 tax being payable.
The UK shareholder effectively used the company’s money to finance the transaction which he later repaid by voting dividends with an effective tax rate of 8.75%. This uplifted the base cost of shares held which will be available to set against any future sale proceeds.
Reorganisations are often used for succession planning, preparing for a sale, protecting assets, or improving tax efficiency. They can also help separate distinct areas of a business or restructure ownership between shareholders in situations such as divorce, death or retirement.
Without proper planning, a reorganisation can trigger unexpected tax charges such as capital gains, stamp duty, or income tax. Early advice will ensure thatthe transaction qualifies for reliefs or exemptions where available.
In many cases, especially where a new holding company is introduced or a demerger is planned, seeking advance clearance from HMRC is strongly recommended. This helps avoid uncertainty and ensures the transaction is treated as tax-neutral.
A statutory demerger follows a formal legal route using company law procedures. A non-statutory demerger uses a series of corporate steps to split a business. Each has different tax and legal implications, and we can help determine the most efficient route based on your objectives.
Yes, FICs often involve setting up a group structure or transferring assets, which may qualify as a reorganisation. They are commonly used for estate and succession planning and must be carefully structured to ensure tax efficiency.
