The co-owner of your company wants to go his own way. His idea is to hive off one of your company’s trades which he will run. What are the tax consequences if you go along with his suggestion?

Unintended tax trap

Often the tax system seems to get in the way of running your company how you want. One such situation is where you want to divide your business operations. The trouble is that splitting a company’s trading operations by creating another company normally results in the value of the transferred trade counting as a taxable distribution (dividend) for the original company’s shareholders. But there’s a solution.

Let’s get divorced

The so-called demerger provisions offer a tailor-made way to hive off trades into separate companies tax efficiently (but not if your intention is to isolate a trade so you can sell it to new owners). Where the conditions of the demerger provisions are met, the value of the trade transferred doesn’t count as a taxable distribution, it’s exempted.

Example. Acom Ltd, which operates two trades, is owned by two shareholders. One shareholder, Bill, wants to develop one of the trades, but the other, Ben, does not. They can demerge Acom’s trades by setting up a new company in which Bill owns all the shares, Bcom Ltd, and transferring the assets (valued at say £50,000) relating to the demerged trade from Acom. Usually, the £50,000 would count as a taxable distribution resulting in a tax bill for Bill and Ben. But if they obtain approval from HMRC the tax is avoided because the distribution is tax exempt.

Demerger problems

Company law is a potential stumbling block for demergers because it doesn’t allow the transfer of assets by one company to another for no payment. There are a few ways around this but they can be quite tricky.

Tip. For a privately owned business, the least disruptive, but not necessarily the most straightforward, option is to transfer the assets of the trade you want to demerge as a dividend in specie.

Other taxes

Aside from avoiding a demerger charge, this arrangement is largely ignored for capital gains tax purposes. Also the transfer of assets won’t be liable to stamp duty (where they are transferred as a dividend in specie) and neither is it subject to VAT as it counts as a transfer of a trade as a going concern. It’s an ideal solution but steps have to be taken before the plan is put into action.

HMRC clearance

In practice a demerger as we’ve described takes some planning plus clearance from HMRC. It’s not for the tax uninitiated and you should get your accountant involved at an early stage to ensure that the Is are dotted and the Ts are crossed. But now you know how it’s done, if you and your fellow shareholders find yourself in the same position as Bill and Ben, or something more complicated, you’ll have a tax-efficient strategy you can work with.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.