How can capital demergers be tax-efficient?

July 15, 2022

The steps towards obtaining a refund on capital demerger can consist of:

A new holding firm is placed beside the existing firm through a term of dividend exchanges.

  •  Generally, the new holding firm shall have divided capital equal to the market value of the combined business 

interests of the existing firm.

  • The estate interests of the company are then transferred to the new holding firm.
  • Then, the original firm gets distributed to a new firm.
  • Simultaneously, the new holding firm decreases its dividend fund by a number of dividends which are equivalent to the market value of its vending activities. 
  • Then, the new holding firm goes on to give dividends to the shareholders of the new Holdco, due to the distribution.

Let us consider an example of selling a firm to a third party

X Ltd is a successful firm which has traded for many years, making and selling its fragrance products through retailers and wholesalers. 

The firm owned its trade premises, estimated up to a value of £10.6m.

Thereafter, the managers of X Ltd got an offer from an independent third party. They had wished to purchase X Ltd's vending activities for £10m.

The third party were unable to afford to purchase X Ltd's trade premises. Thereby, they wished to take it on a lease basis from its present owners, as the present owners had also wished to withhold the firm and its premises.

Thereby, it became mandatory to consider how to differentiate the firm's business activities from the interests of the premises.

As per the scenario outlined above, a retrieval of capital demerger could be an efficient method to allow the division of the business activities and property. This is because there would be no chance of incurring taxation. The taxes that would not be applicable would be:-

  • Corporation Tax
  • Income Tax
  • Capital Benefits Tax
  • SDLT
  • VAT

Thereby, this permitted the forward sale of a firm which owned the trading company, at £10m, while it also permitted the 'sellers' to withhold the firm which owned the previous business property.

With this strategy, the business owners were able to claim a BADR. Thus, their primary £1m of capital gains, got taxed at 10%. The latter got taxed at 20%.