Section 110 Demerger

Section 110 Demerger

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I have a client who is looking to sell the business which is a limited company but there are various properties held in the company which they want to transfer to another company and then sell the trade. I was thinking of doing a Section 110 demerger but I wanted to check that my understanding with regards to entrepreneurs relief was correct. From what I have read HMRC would be happy to accept that the sale of the new company holding the original trading company would qualify for ER as the holding period of the shares would relate to the original trading company and therefore be treated as being continuous. Is that correct or am I totally wrong. 

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By chicken farmer
07th Oct 2014 13:05

Distribution

Have you considered the tax consequences of actually demerging before even getting to the question of entrepreneurs' relief? The relief under s. 216 will not apply as you do not seem to be splitting a trade.

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By MBK
07th Oct 2014 13:26

A couple of things

Firstly, when you say "then sell the trade" you presumably actually mean sell the shares in the trading company. In which case you should be looking at doing a reconstruction using a capital reduction under CA2006, which avoids the necessity for a liquidation. Much cleaner, cheaper and quicker. Not much understood yet as a mechanism - and you will need specialist advice.

If you do that successfully (and get clearance as appropriate) you will have a reorganisation with the shares in the trading company being treated as if they were the shares in the original company - so ER should be available if all the other conditions are fulfilled.

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By Steve Kesby
07th Oct 2014 13:42

A couple more things

I agree with MBK regarding a capital reduction demerger. Liquidation demergers do tend to have the efect of haemorrhaging cash into the liquidator's pockets.

Not worked it through, but I think you can acheive a base cost uplift on the properties and bank ER on the property value as well if you invoke TCGA 1992, s. 169Q.

EDIT: Actually, I think you might be banking ER ( and paying tax @ 10%) on a gain that wouldn't otherwise be chargeable at all!

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By Davies1
07th Oct 2014 15:35

Thank you for your comments. MBK yes I mean they wish to sell the shares of the trade. The problem with doing a reconstruction using a capital reduction  is that there are only 4 shares issued to the two shareholders. 

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By MBK
08th Oct 2014 13:46

The fact that there are only four shares issued...

.... won't be an issue.

A minor irritation requiring, possibly, the issue of some further shares. But even that may not be necessary. A capital reduction works just as well reducing by £1 as it does by £1m.

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By gbuckell
08th Oct 2014 15:00

Getting clearance

I did a s110 demerger in similar circumstances a few years back and received clearance without problem. I agree with the comments that a capital reduction demerger might be a better route. I would have thought that putting a Newco over the top first would overcome the issue of lack of sufficient share capital. But my main concern is that I heard comments on a recent course to suggest that HMRC has become much more reluctant in recent months to give clearances for demergers when one part is being groomed for sale.

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