A demerger is when a company decides to split off one or more of its divisions to operate independently or to be sold off. It’s a great strategy, a valuable one in fact for businesses that want to refocus on their main profitable units to create a greater shareholder value. A demerger plan is also a great strategy for separating the ‘weaker’ business units that are lowering your company’s overall performance. If a business has reached a position where it is now involved in rather different areas of products and services it can be best to split the parent company into new divisions.
A demerger distribution generally involves one of the following options;
- A direct subsidiary distribution
- An indirect subsidiary distribution
- An indirect trade distribution
To advise clients on which of the options is the most appropriate to undertake a demerger, it is necessary for us to understand your reasons so we can explain to you the various tax charges that can arise under each scenario. This is why it’s important to speak to an expert who can give you tailored advice that’s suitable for you and your business.
Why do companies demerge?
There are many variables that can cause a company to demerge. Depending on the situation it can be advantageous for a company to do so. Some of these reasons may include but not limited to;
- Shareholders protection – Some Directors like to add protection for the shareholders and therefore place assets in a different company to do so.
- Facilitating a sale – When a sale is happening and the buyer does not wish to acquire all of the assets or subsidiaries a business can move the parts that the buyer does not want.
- Release Capital – If a company has share premium they can put this to better use by demerging. It’s a great way of releasing capital to shareholders and can benefit companies.
- Business Restructure – If a group has subsidiaries in different jurisdictions and the company wants to place them all under one division they may wish to demerge.
- Shareholders/directors (maybe even family members), see a different direction for the business. Allows for the separation/division of the business, so each party can take their own path.
Ultimately there are lots of different reasons why companies choose to follow a demerger plan and they can have advantages and disadvantages for each. It’s good to remember that just because a company has been around for a while with a particular set up it may not be the most appropriate one long term. We suggest that before you look into splitting up your company you speak with a trusted tax specialist to help work out how it could benefit you in the future.
Are there tax implications of a demerger plan?
In fact a demerger plan can have some real positive tax implications for a company. As the different components of the business or the assets will be separated it can make the company more aligned with regulatory rules and procedures.
However, to help avoid any chargeable gain for the company and shareholders and to manage income tax, the demerger plan should be structured effectively and carefully. Further reliefs from stamp duty and SDLT may also be applicable. Certain tax provisions should be included in any demerger agreement to account for compliance or historic group tax relationships. If a demerger plan follows the correct sequence of events it can lead to legitimate tax exemptions and therefore is important to keep in mind when structuring your plan.
What are the main advantages of a demerger?
- A great perk of a demerger is that the share values and prices can rise significantly in both companies.
- It gives scope for a company to focus on its own growth and profit.
- As you will no longer be having shared money pots between the companies you can gain greater control over the assets.
- If one of the split companies received a damaged reputation you can now dissociate from this company and solely focus on the division that is performing best.
- A huge advantage a demerger gives is the use of having your own management and directors for the company rather than having to deal with a shared board giving you more control over the business.
What are the main Disadvantages of a demerger?
- Large firms are often more efficient than small ones because they can gain from economies of scale. This is only enjoyable as a large sized company and therefore the split-up will damage this and no longer be an advantage.
- Internal factors such as employees also get affected by a demerger plan. As the split of divisions take place your employees also have to split. This can go one of two ways; employees are happy with the split and want to work for the company they have been assigned to or it may have a negative spin and employees may wish to leave and feel demotivated.
As time evolves demergers are becoming increasingly popular with large companies who have a vast amount of operating divisions. It’s favoured due to its ability to focus on the main business areas that will then help to enhance the performance of the business and create synergy. Seeking expert knowledge is always advised as demergers are hugely time consuming and very complicated so it’s best to speak to a specialist who can deal with any legal issues and protect you from any downfalls.
Top tips to remember:
- If you have made the decision to demerge make sure that it is for the right reasons and based wholly on business issues.
- Appoint someone within the management team to take lead and handle the demerger to help streamline the process. Whoever you select needs to be a strong team member who can successfully liaise with accountants and lawyers consistently so pick wisely.
- Always seek specialist help from a good team of accountants as they will be able to help with the complexities of the demerger and ensure that legal issues and taxation is dealt with properly.
- Be aware that the demerger will be heavily time consuming and requires lots of perseverance. It is not a quick fix and you should be prepared for wait. Your desire to have a successful performing business will keep you motivated through the complexities.
- Synergy is key and once the demerger plan has been completed and you are officially ‘demerged’ you can begin solely focusing on bringing value to your customers and hitting those business targets.
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