Is there is a tax neutral way of splitting a company?

Is there is a tax neutral way of splitting a...

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I would like to split a company in a tax neutral way. By this I mean without any triggering any income tax, corporation tax or capital gains tax liabilities. The company in question is not trading and has a clean balance sheet (i.e. the only asset is cash and no liabilities). There are 3 shareholders with equal shareholdings. All shares rank pari passu. The shareholders would like to become sole shareholders in their respective companies i.e. shareholder A becomes 100% shareholder in company A, shareholder B becomes 100% shareholder in company B and shareholder C becomes 100% shareholder in company C. The assets of the respective companies A, B and C would simply be the 1/3 share of the balance sheet value of the original company.

I have considered a s.110 demerger which should work (s.136 TCGA should apply) but it seems a costly process to effect the above. I don’t think s.139 will apply as the reconstruction is not of a business. However, there are no chargeable assets within the company. Is it possible to apply for clearance under s.136 in isolation?

I have two questions a) does a s.110 demerger achieve my aim  and b) is there a simpler/cheaper alternative?

Thank you

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By MBK
10th Dec 2013 13:44

Answers

Yes - a S110 demerger can potentially achieve your aim. But it does depend upon what the assets are. If it's property investment then it is possible, but there will be SDLT charges along the way.

I'm aware that there is possibly also a route using a statutory reduction of share capital.

But there isn't a cheap or easy way. You will need specialist help.

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By johngroganjga
10th Dec 2013 13:52

Why do they want to turn a cash shell into three cash shells?  Wouldn't they prefer to extract the cash?

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By Steve Kesby
10th Dec 2013 13:57

Holding cash...

... isn't a business, as you note, so you don't have a scheme of reconstruction as defined in Sch 5AA, so S. 136 wouldn't apply either.

Distribute and pay income tax or liquidate and pay CGT seem to me to be the only options.

@ MBK - Don't HMRC regard a capital reduction as a transaction in securities in these circumstances?

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Replying to lionofludesch:
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By Twinkle123
10th Dec 2013 15:50

Is it a business

Steve - firstly - thank you for pointing out that s.136 cannot apply without meeting the reconstruction tests in Sch 5AA.

I've just called the HMRC Clearance and Counteraction Team and they have advised that I should be able to meet the "business" test given that up until very recently the company was involved in managing and letting residential property.

Two of the shareholders are not keen to crystalise a gain currently hence the desire not to liquidate!

However, I suspect one of the shareholders may liquidate his cash shell after demerger...this has got me worrying about the TIS legislation.

I'm thinking of setting out the commercial reasons i.e. shareholders want to do their own thing and go for advance clearance for s.136/139 and s. 701 ITA

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By MBK
10th Dec 2013 14:04

Sorry ....

.... I missed the fact that the only asset is cash.

So S110 demerger won't work as Steve says. Interestingly, it can work if the only assets are shareholdings in other companies, even if not trading companies.

@Steve - The capital reduction route was new to me at a recent conference. Don't pretend to fully understand it, but there was no mention of an issue with the TIS legislation.

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By johngroganjga
10th Dec 2013 16:15

The simple way of not crystallising a tax liability is to do nothing.

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