Senior Tax Manager Richard Grimster and Head of Insolvency, Paul Pittman, discuss the potential tax and commercial benefits of a non-statutory demerger and the role of the liquidator with s110.
What is a Section 110 (s110) Demerger?
s110 is a reference to legislation found in the Insolvency Act 1986 which allows a company to split in two in a tax neutral way. This technique is often used to demerge a new riskier aspect of a trading business for the purposes of protection, for succession planning or as part of reconstruction of a business prior to a sale of some major part of it. However, it also has an advantageous application for the demerging of land and property.
Why use this method?
In the case of property it is not possible to undertake a ‘Statutory Demerger’ as this is only available to split trades. That said, it is particularly important from a tax perspective to consider the inclusion of valuable property in any trading business – especially residential property.
Our most common advice to business owners is to not mix their business and property of any type in a company as this has commercial and potentially capital tax ramifications. If the property becomes valuable, or is an investment asset, then it can be important to remove this from the company.
The s110 demerger allows for the property to part from the company into another corporate vehicle owned by some or all of the shareholders of the trading company. This is done in a tax neutral way via a liquidation which ensures at both company and owner level there is no tax leakage.
In fact with property involved it is possible to have an uplift, for company capital gains purposes, to market value from cost at the point of the liquidation which can save a considerable amount of tax on a future sale of that property.
While there are other methods of demerger this one in particular for properties can provide a flexible way of ring-fencing parts of the business. We will provide more information on how this new register will affect charities as and when it becomes available.
Are there many risks associated with this type of demerger?
All tax planning involves an element of risk. This is a method adopted regularly and we work together in the tax and insolvency side of the practice to ensure any issues are picked up and dealt with during the process.
We will fully review the proposed transaction from a tax perspective and agree it with HMRC by way of clearance applications where possible. While this is for us to deal with, some key aspects from a tax perspective are:
- SDLT, which can be avoided in most cases with clearance from HMRC
- Corporate tax degrouping charges, on assets previously transferred in a group
- Protection of losses
From a commercial perspective you will need to consider some other practicalities:
- Banking arrangements, your lenders will need to be notified and agree to the change
- Solvency statement, a liquidator will require a statement of solvency to be signed by the business managers
- Indemnification and appointment of a liquidator, this is a key step and using an experienced team will certainly assist in negotiating all of these potential pitfalls.
So what about the liquidation aspect?
Paul and his team deal regularly in business reconstructions and solvent liquidation work. It is a common misconception that insolvency practitioners (“IPs”) only liquidate insolvent companies or are appointed to failing businesses.
The role of the liquidator in these situations is often undervalued. However, the liquidator is essential to the process, and it is a requirement that the liquidator is licensed to act as such. There are a lot of considerations pre-liquidation that need to be taken into account, which if not dealt with can slow down the process, especially if there is a tight deadline.
These are just some of the things to consider:
- Is the bank ready to release security?
- Will the landlord transfer leases?
- Can contracts be novated?
- Will the insurance cover continue in the “New Co”?
- Do you have experienced legal advisors?
It is best to plan early, and put in place a timeline, and ensure that all parties take responsibility for their part. If you get the planning right, this should allow for a smooth transaction.
If you have valuable property assets mixed in with your business or a property portfolio held in a company which has some riskier investments within it, then please get in touch to arrange a free initial meeting to discuss this and other tax and commercially advantageous options available to you.
If you have valuable property assets mixed in with your business or a property portfolio held in a company which has some riskier investments within it, then contact us with the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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