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Section 110 Reconstructions and Demergers

22nd Oct 2014
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Some Accountants have clients who are looking to demerge a business using Section 110 of the Insolvency Act 1986.

Example scenarios

The reason for doing this includes:

  • To separate 2 or more businesses (e.g. a trading business and property business) in the same company if one business is to be sold and the other retained
  • To separate connected companies – e.g. to remove a loss making part of the business
  • To redistribute shares – e.g. where two directors have shares in both Company A and Company B; and they want one director to just have shares in Company A and the other just in Company B

There are structures which may entirely mitigate corporation tax, income tax, capital gains tax, stamp duty or stamp duty land tax on the reconstruction.

As with reinstating a dissolved company to realise assets, an C would do the MVL aspect with a solicitor doing the necessary legals.

The benefits

The main reasons for using this process are:

the opportunity to restructure businesses and shareholdings tax free

allowing selling shareholders to benefit from Entrepreneurs’ Relief (cgt @ 10%) on a sale

HMRC clearance available for much of the tax restructuring.

 

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Replies (2)

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Portia profile image
By Portia Nina Levin
23rd Oct 2014 10:39

In most of these scenarios

A capital reduction demerger works just as well, if not better, and saves an absolute fortune in liquidator's fees.

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By The VAT Doctor
25th Oct 2014 09:03

fees, glorious fees

Agree on the fees. Top 10 firms often over £50k, big 4, who knows! Having dealt at the edge of a few of these, I would also mention that there can be VAT issues when assets start getting moved round etc and the need for VAT groups or other planning.  If not considered, the VAT can be a real headache.

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